Affluent buyers are encountering resistance when going for a massive mortgage, and are therfore finding that paying cash for a vacation home may be the easier route. On the one hand, lenders say they are concerned about providing loans on niche homes, like ski chalets or vacation homes, that are only used a couple months out of the year, and which are difficult to value.
Vacation homes are referred to as second homes in mortgage terms, and borrowers have to undergo extreme scrutiny as to their true intentions with such properties. Many lenders say homes with renters are deemed riskier partly because there is a greater chance that they’ll incur damage or other losses. If borrowers do receive the mortgage, it comes with several perks: some lenders offer the same terms, including the same interest rate and down payment requirement, as they do on primary-home mortgages. Borrowers can also tap into tax benefits, and often, they can deduct interest payments on a total of up to $1 million of mortgage debt on their primary and secondary residence.
Lenders are also keeping tabs on owners after they receive the loan. Many lenders require borrowers to sign a so-called affidavit of occupancy where they confirm the home will be owner-occupied. This agreement can give lenders the legal right to change the terms of the loan or demand immediate repayment if they find the home is being rented. Borrowers who are unable to make that payment could risk going into foreclosure. Also, some lenders say they occasionally contact the Internal Revenue Service to request transcripts of borrowers’ tax returns to look for rental income.
For borrowers, sticking to the rules can be challenging - it makes sense financially that if you’re not going to be using it, why not rent it out? As a result, strict lending requirements have led more buyers to pay all cash for vacation homes rather than sign up for financing. Last year, almost half of all vacation homes were bought without financing, according to the National Association of Realtors - a record so far.
