Getting a 10% Down Vacation Home Loan: Everything You Need to Know

Buying a vacation home is an exciting prospect for many people looking forward to weekends and summers in their favorite destination. However, coming up with a 20% down payment on a second home can be a major obstacle. The good news is that you may be able to get a vacation home mortgage with just 10% down through a conventional loan. Here’s what you need to know about securing this type of financing for your dream vacation property.

What is a 10% Down Vacation Home Loan?

A 10% down vacation home loan allows you to purchase a secondary residence as a vacation home with just 10% down This is half the typical 20% down payment requirement for investment properties and second homes

With 10% down on a vacation property, you can get a conventional mortgage loan just as you would for a primary residence. The loan terms and interest rate may be slightly higher than for a primary home, but you avoid the higher rates and stricter criteria of a true investment property mortgage.

Benefits of 10% Down Vacation Home Loans

The main benefits of securing a vacation home with just 10% down include:

• Lower upfront cash needed – 10% of a $200,000 home is $20,000 versus $40,000 for 20% down. This lower entry cost makes vacation home ownership more accessible.

• Avoid jumbo loan requirements – A 10% down vacation loan keeps your loan amount under conforming limits, whereas 20% down might push you into jumbo territory for higher mortgage rates.

• Take advantage of low rates – 10% down keeps you in conventional mortgage territory so you can get a low interest rate versus an investment property loan.

• Keep your current mortgage – 10% down means you may not need to tap equity in your current home through refinancing to come up with a full 20% for the vacation property.

• Potentially lower payments – Lower down means lower loan balance to finance, which equates to lower monthly mortgage payments.

Qualifying for a 10% Down Vacation Home Loan

While 10% down vacation home loans offer great benefits, you still need to meet certain criteria to qualify for the mortgage. Here are some key considerations:

• Credit score – You’ll likely need a minimum credit score around 720 for the best rates on a vacation home loan with 10% down. This is higher than the 620-680 range typical for a primary residence.

• Debt-to-income ratio – Lenders may allow up to a 45% debt-to-income ratio on a primary home, but second homes often have a maximum ratio of 38% or lower. Make sure your income adequately covers both mortgage payments.

• Cash reserves – Lenders want to see you have enough cash leftover after closing to cover several months of both mortgage payments in case of job loss or other financial hardship.

• Occupancy – Borrowers need to certify the home is a second residence owned for personal use, not a rental property or flip. You’ll have to sign an affidavit confirming no intent to rent.

• Distance from primary – The home must be a certain distance from your primary residence, often 50 miles, to qualify as a true second home and not just an extension of your primary residence.

• Use restrictions – 10% down mortgages may limit use to a certain number of days per year, such as 180 days. Pure vacation home loans have fewer restrictions than second homes that are also income properties.

How Much House Can You Afford with 10% Down?

The amount of vacation home you can afford with 10% down depends on factors like:

• Your income – Lenders look at your gross monthly income to determine amounts you can qualify to borrow. Higher earners can get bigger mortgage amounts approved.

• Existing debts – The higher your current monthly debts, the lower your qualifying mortgage amount will be.

• Loan program – FHA loans allow down payments as low as 3.5% but have lower borrowing limits. Conventional loans allow higher loan amounts but with 10% to 20% down.

• Credit score – Those with scores above 740 qualify for the widest range of loan amounts and lowest rates.

As a rough guide, with 10% down you can potentially afford a vacation home price up to 4.5 times your annual income if you have minimal existing debts. Talk with a lender to get pre-approved and see exactly what price range you can comfortably afford.

Should You Put Down 10% or 20% on a Vacation Home?

Putting down 20% on a vacation home has some advantages that may make it worth striving for if possible:

No PMI – Private mortgage insurance adds to your monthly costs. With 20% down, you can avoid this added PMI expense.

Lower rate – 20% down shows lower risk so you may qualify for a 0.5% lower mortgage interest rate. This can add up to thousands in interest savings.

Build equity faster – The more you put down upfront, the faster you build equity through your mortgage payments to gain ownership stakes.

Potentially better appreciation – In hot markets, homes with 20% equity see higher appreciation versus 10% down homes.

Easier to rent – Vacation homes with 20% or more in equity typically have fewer restrictions on renting and easier qualification as investment properties.

If you have the funds available, 20% down is ideal. But 10% down vacation home loans allow more buyers to access second home ownership sooner.

What Are Current 10% Down Vacation Home Mortgage Rates?

Mortgage rates fluctuate daily based on economic factors like the fed funds rate, employment numbers, and inflation. In general, as of 2023, average 30-year fixed rates for 10% down vacation home mortgages are:

• Conforming loans – Around 6.5%

• Jumbo loans – Around 6.75%

So you can potentially lock in vacation home mortgage rates in the low to mid 6% range right now with 10% to 20% down. Actual rates you are quoted depend on your specific financial profile. Getting pre-approved is the best way to see what rates you qualify for.

Tips for Getting the Best 10% Down Vacation Home Loan

Follow these tips to get the most favorable terms on a vacation property mortgage with 10% down:

• Shop multiple lenders – Compare loan estimates from lenders like banks, credit unions, and online lenders. Rates and fees can vary significantly.

• Get pre-approved – Pre-approval locks in a rate and shows sellers you’re a serious buyer. It also gives you bargaining power to negotiate the best price.

• Improve your credit – Work on boosting your score as close to 800 as possible so you qualify for the lowest advertised rates.

• Lower your debt – Reduce other monthly obligations so you have the best debt-to-income ratio possible.

• Make a larger down payment – Putting down 15% or 20% down if you can may reduce your rate even further.

• Consider adjustable-rate – ARMs with a fixed period of 3, 5, or 7 years can sometimes get lower rates in exchange for future rate fluctuation risk.

10% Down Vacation Home Loans Open Doors

Owning a vacation home is a dream for many, but the key is making it affordable. Conventional 10% down vacation home loans allow borrowers to finance a second home for less upfront cash than the traditional 20% standard investment property down payment. While qualifying criteria are stricter than for primary homes, 10% down vacation loans allow more buyers to start building equity in a vacation property sooner to enjoy for years to come. If buying a vacation home is on your short list, talk with trusted lenders to go over your options and get pre-approved today.