May 11 2022

Financing Options That Broaden Your Clients’ Home Buying Potential

Let’s look at some niche mortgage products targeted at specific types of homebuyers that real estate agents can help educate their clients about.

Whether you're looking to escape to the beach, the mountains, a lakefront retreat, or a vibrant cosmopolitan scene, having a vacation home is one of the best ways to go. Let's delve into some things to think about if you're thinking of buying one. 


What exactly is a vacation home?

While they may seem identical, vacation homes and second homes are not always the same thing, and they may be classified differently for tax purposes, such as when the time comes to sell the property down the road. While one can rent out a vacation home, vacation homes are different from investment rental properties, in that vacation homes are defined as secondary dwellings that are not the owner's primary residence and are partially for recreational use by the owner. If it's to be considered a vacation home, the owner must use the home for personal purposes more than 14 days a year and stay there at least 10% of the number of days that the home is rented.

Platforms such as Airbnb and Vrbo have made it easy to generate income with vacation homes. If that's your plan, you'll want to do some homework and look into the vacation rental market before you buy. While there are several online tools to do this, the independent analytics firm Airdna is a top choice because they specialize in Airbnb vacation-rental data. There you'll find metrics on factors such as invest ability, revenue growth, rental demand, and much more. 


It's a Hyper Competitive Market 


As is the case with the market for primary residences, the vacation home market is red hot and on a steady rise that's seen a jump since the onset of COVID-19. Data from the National Association of Realtors shows that vacation home sales rose by 16.4% in 2020, well outpacing the overall growth of existing-home sales, and the increases continued through the first few months of 2021. According to Redfin, in March 2022, the demand for vacation homes was up about 35% above pre-pandemic levels. And that's a drop-off; Redfin reported a whopping 87% increase in vacation-home demand the month prior. 


Starting Your Search

As vacation rental markets are most often specialized and local, you'll want to find a local real estate agent at the onset of your search. This local expertise can be especially important if you plan to rent your vacation home, as short-term rentals are illegal in some locations and a range of other local zoning and rental rules may apply.  


Choosing the Location 


While most people know the old real-estate adage of "location, location, location," many don't know exactly why that's number 1, 2, and 3 on the list of important things to look for in a home. It's rarely the physical structure of a home that appreciates, as nearly all structures depreciate with time, but the land the home sits on that gains the most value. It's not a distinction without a difference; land is a finite resource that's in ever-increasing demand with population growth. And so, land has a significant influence on a home's resale value, often well above any other factor. You'll want to carefully evaluate where that land is and consider these things: 


  • Neighborhood. One gauge to see if you're buying in a good neighborhood is to look at how long homes for sale there stay on the market. If they don't last long, that's a good sign that others deem this to be a good place to own a home. Another is schools. Whether you plan to take advantage of local schools or not, you should check if the area is served by good public schools, which often adds value to homes in that location. And even if you're searching for a secluded getaway, you'll still want it to be close enough to some restaurants, shopping, and grocery stores. 


  • Lot considerations. If the home has a nice view, that home's lot should have solid appreciation in value. Views of water, or even just being near bodies of water, can add significant value when you decide to sell the home. On the contrary, homes that face anything unsightly, such as major roads, congested commercial areas, or homes that look directly at a neighbor's home, tend to have less resale value. 


  • Development. Is the home you're looking to buy in an established neighborhood, or do you see lots of spaces around the home where change could happen? If it's the latter, you'll want to investigate if there are any plans such as housing starts or large construction projects in the works. These changes could have positive impacts on your home's value — such as hospitals or transportation infrastructure — but they could negatively affect both your home's resale value and the time you want to spend enjoying your vacation home. 


Green Features are the Future 


While location may be the biggest factor in determining a home's value, it's not the only one. According to the National Association of Realtors, almost two out of three homebuyers called green features "somewhat valuable" and about the same number of real estate agents and brokers find value in listings that promote energy efficiency. So energy-efficient windows, insulation, solar panels, and Energy Star-rated appliances are all things to look for in listings. 


Financing Your Vacation Home 


When heading into a competitive sellers' market, whether it's for a primary or a second home, there may be no more valuable a tool for a homebuyer to have than a mortgage pre-approval. As for financing options, you have lots to choose from. Here are just a few:  


  • Self-employed homebuyers may look to Bank Statement Loans for their second homes. Loans for up to $3 million consider bank statements rather than more traditional requirements, such as tax returns.
  • People with considerable equity in their primary residence might consider Cash-Out Refinancing to buy a vacation home.
  • Conventional mortgage loans that conform to guidelines established by Freddie Mac or Fannie Mae can be great ways for some to buy vacation homes. 


No matter where you buy your vacation home or how you'd like to finance it, the loan originators at City Lending are here to help you get your perfect home away from home. 

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