5 tips about refinancing a vacation home

Posted by  on Sep 01, 2012

Refinancing a vacation home is similar to refinancing your primary residence, but the standards required by a mortgage lender are likely to be higher. Lenders require complete documentation on a vacation home refinance, which includes a review of your credit, your income and assets, as well as the current value of the property. Compare mortgage rates from several lenders and consider these five tips when refinancing a vacation home.

  1. Home equity. Resort-area home values have suffered declines around the country in recent years, so you may be surprised at how much (or how little) home equity you have. Even if you made a down payment of 20 or 25 percent a few years ago, you could have less equity than that now. Lending standards are usually more stringent on vacation homes because lenders assume your first priority would be to keep up with your primary residence mortgage payments if you have any financial difficulty. FHA loans are not available on vacation homes, and conventional lenders typically ask for 20 to 25 percent in home equity in order to qualify. While some lenders may qualify you with less than 20 percent equity, most require private mortgage insurance (PMI) which increases your monthly payments.

  2. Good credit. In order to qualify for the lowest mortgage rates, your credit score should be 720 to 740 or higher. If you have a credit score between 640 and 720, you will likely pay slightly higher mortgage rates than someone with a better credit score. If your credit score is below 640 or 620, it is nearly impossible to qualify for a new mortgage loan, particularly for a vacation home.

  3. Sufficient income. Lenders today have strict guidelines about debt-to-income ratios and they will need to see that you can afford all of your housing payments on both properties along with other monthly bills. For conventional loans, most lenders cap your overall debt-to-income ratio at 41 to 45 percent depending on their guidelines and your compensating factors such as assets and job history.

  4. Full documentation. To facilitate your refinance application, you should be prepared with pay stubs, bank statements and tax returns. An appraisal is usually required, and you may need to schedule time to facilitate it. If your lender asks for additional documentation, provide it as soon as possible in order to close more quickly.

  5. Resist temptation. You can expect higher interest rates for a vacation home -- about one-eighth to one-fourth percent higher than for a primary residence mortgage. In response, some vacation homeowners may be tempted to pretend their vacation home is their primary residence in order to refinance with less equity and obtain a lower interest rate, but lenders do check a variety of records to confirm your primary residence.

While you may need more equity to refinance a vacation home, having good credit and sufficient income should help you qualify for a lower mortgage rate which can make your home away from home that much more enjoyable.

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