10% Down Vacation Home Loan - Which states can you do it?

[Julia Taylor]

I'm researching STR markets and wondering which states/markets it's relatively easy to get a 10% vacation home loan in? I've been pre-approved in FL, NC, GA, and TN. However, in FL the 10% down doesn't work for most condos (and condos are what my budget will afford), and in NC both lenders I've talked to say you need 20% down, no matter whether it's a condo or a SFH. So I'm searching for additional states/markets where lenders can do the 10% down (I fell in love with NC and then later found out about the tighter restrictions - trying to avoid that situation again!).

[Mitch Davidson]

Hi @Julia Taylor. Conventional loans for second homes are available for all US territories, and for just 10% down, even if the property is a condo. If the lender cannot offer second home loans in certain states, or for as little as 10% down, I would assume that they have some internal restrictions, and/or some from their servicer, as such aren't coming from Fannie or Freddie.

It may be the case that some lenders are saying 20% is the minimum, much like lenders often do when talking about conventional for investment (where the minimum down is really only 15%), because the points cost for putting less than 20% down is quite hefty. Meaning, on a $400K second or investment purchase you might have to pay a few grand of additional points to put 5-10% less than 20% down. Then, add on the .75 of points (meaning .75 of loan amount) that we have to add for a condo, and your cost is hefty. Still better overall than DSCR though, and without the prepayment penalty and appraisal challenges that come with DSCR.

Why can't we just give you a higher rate to effectively absorb or nullify the points cost? Lenders are bound to rate spread rules, meaning any conventional lender I know of right now will tell you the highest they can go is X (likely 5.6-6.0 today), and that you'll have to pay points to buy the rate down because the rate would effectively be higher but they can't go higher. 

Also, you may have heard that recently, FHFA (oversees Fannie and Freddie, as well as FHA and HUD) raised the cost for conventional second home loans so that they nearly match the cost (meaning rate and points) of that of conventional investment home loans. Previously, second home loans with the minimum down had exactly or nearly exactly the same rate/points as primary residences. Sadly, those days are over...for now at least.

Finally, to @John Underwood's point, it is okay if you purchase as a second home with the plan to STR the home, so long as you also plan to use it personally from time to time. Fannie and Freddie will not allow you to use projected rent for the second home to help your DTI work, unlike conventional for investment, but it's okay to intend to STR the property. They also do not want the home to be entirely controlled by a property manager (the language seems to speak of something like a timeshare or resort home, where you have no control, as opposed to a scenario where you use a PM for some limited support).

Some lenders layer on additional restrictions, which are typically pushed down from the servicer they sell to (some of us don't sell our servicing, and thus don't have these additional rules). We call these "overlays." For example, some lenders will require you to sign an agreement saying you'll spend at least 18 days per year at the home, that you'll never use a property manager (even in a minor way), or even that you'll never STR. And some have rules about how close the home can be to other homes you own. These are not Fannie and Freddie's rules, however, but rather extensions of such.

Happy to discuss further if you'd like to setup a call.