Financing a Vacation Home

Real estate luxury homes vacation
Baris Simsek | Vetta | Getty Images

Buying a vacation home these days requires plenty of cash on hand.

Mortgage down payment requirements are considerably stiffer than for primary residences, and lenders are scrutinizing income more closely, which can make financing especially difficult for the self-employed.

The tougher terms make for a "bittersweet situation" in the Hamptons, said Judi Desiderio, the president of Town and Country Real Estate in East Hampton.

Many of her clients "have given up on getting mortgages — totally," and instead are paying cash, she said. But as much as she hates to say it, Ms. Desiderio said the real estate market is probably better off this way. "If money was as easy to get as before the crash," she said, "I think we would have real estate pandemonium. It would create a whole new bubble."

Nationally, the number of vacation home sales last year rose 10 percent over 2011, to 553,000, according to a National Association of Realtors survey released this month. As a share of all purchase transactions, however, vacation-home sales remained flat at 11 percent.

The same survey found that 46 percent of vacation-home buyers paid in cash last year. For those who financed a purchase, the median down payment was 27 percent.

For conforming loans (up to $625,500 in the New York area), most lenders require 35 percent down on a second home, though a few accept 20 percent down, said Pattie Romanzi, the president of the Par East Mortgage Company in East Hampton.

The down payment requirement on jumbo loans typically is 25 to 30 percent on amounts up to $1.5 million, and then 35 percent and up. The banks "just don't make exceptions on a second home the way they do on a first," Ms. Romanzi said. "And some want to see that you have X amount of months' payments left in reserves."

Self-employed buyers who have the cash for a down payment may still run into difficulties. These are people who tend to "whittle down" their adjusted gross income for tax purposes, but "that doesn't help in the mortgage world," said Daniel Gualtieri, the vice president of the Hamptons division of GFI Mortgage Bankers. "This whole Dodd-Frank thing is all about the borrowers' ability to show that they are qualified to repay the loan," he said, referring to the 2010 financial reform law. "The lender's job is to disclose this in as many ways as possible."

Another potential problem for these buyers is that banks take two-year averages on income. If the sagging economy hurt a buyer's business in 2011, a better showing in 2012 still may not be enough to satisfy the income requirements.

There are stated-income mortgage programs — in which borrowers' income is not verified — but terms are more stringent. Financing typically covers up to 65 percent of value up to $1 million, and no more than 50 percent above that, Ms. Romanzi said.

On the Jersey Shore, the extensive storm damage from Hurricane Sandy scared away some lenders. "We're not seeing the big banks writing loans" in damaged areas, said Eric Birchler, the owner of Birchler Realtors in Lavallette. "But the good news is, the local banks are still writing paper here."

Banks like OceanFirst and Manasquan Savings have stepped up to provide purchase and rehab financing, often through the Federal Housing Administration's 203k renovation loan program, he said. Depending on the bank, down payment requirements are anywhere from 35 to 50 percent.

Appraisals can complicate deals, especially with appraisers from out of the area. "A lot of them were confused before the storm," Mr. Birchler said, "and after the storm they're even more confused."