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Financing pitfall on a vacation rental

Erica Muller Orlando, FL

November 14, 2018

Make sure if you are taking financing on a vacation rental that you understand what type of loan it is. 

Second home loan vs Investment Property loan. 

This will effect how the contract must be written up. 


Daniel N. Denver, CO

Feb 18 2019, 06:46 AM

Great points Erica!

A lot of investors a hard time qualifying for loans for Vacation Rental Properties, which is why we started, specifically for the purpose of creating underwriting guidelines that make it easier to qualify for VR properties because we GET IT. Too many banks are behind the times when it comes to servicing this industry so we've done the work to get lenders onboard to assist all of us investing in this space.

Basically, we qualify the loan based on the actual and/or projected income of the property for purchase using rental surveys of the area, AirDna data, and comps in the area if the data is available from properties you currently run. NO TAX RETURNS/NO PERSONAL INCOME requirement. In addition to that your FICO score is considered which effects the rate. We also lend to LLCs, Corporations, etc. Message me in my inbox or email me at if you have any questions. 

Cyndee H. Madeira Beach, FL

Jan 28 2019, 11:20 PM

We are fortunate in Florida because I have a lender that has actually purchased 2 vacation rentals with me and he has found investors to do 30 yr fixed rate loans on vacation rental properties (condos or homes) We have successfully gotten 2nd home loans for 7-day rental properties as long as not a condo-hotel - he now has a jumbo loan product that's 30yr fixed at rates you see for 2nd homes and making opportunities for a lot of investors with better rates and less money down. Definitely, agree that when representing the seller I check out the lender and if they aren't local and experienced in vacation rentals it's unlikely the seller will take the risk to find out that the buyer is creditworthy however the condo loan can't be approved because the lender isn't experienced and doesn't know how to get through the hurdles we run into every day.  

Donna F. Destin, FL

Apr 25 2019, 02:19 AM

Thought you might find this interesting.  Changes in Second Home Financing  

Second-Home Rider Rewrite
There’s radically different language in the new rider, but Fannie Mae says it just clarifies that owners can rent out a second home
By Katy McLaughlin
Second-home mortgage closings just got less stressful for borrowers. On April 3, Fannie Mae updated a document called the “Second-Home Rider.” The previous version of the rider, in force since 2001, was interpreted by many lenders and homeowners as completely prohibiting second-home owners in mortgages backed by Fannie Mae or Freddie Mac from renting the property.The rider’s new language now explicitly allows homeowners to rent a second home after one year of ownership, and it allows short-term renting in the first year under certain conditions.A Fannie Mae spokesman said the new rider language was triggered by calls from lenders asking whether borrowers could put their second homes on Airbnb and similar services. This was always allowed, said the spokesman, even though the old rider appeared to prohibit it, and was interpreted by many lenders that way.

 For years, anyone closing on a second-home mortgage faced legalese that made it sound like they could never, under any circumstances, rent out their properties. “Borrower shall occupy, and shall only use, the Property as Borrower’s second home,” reads the old Fannie Mae/Freddie Mac rider, attached to every deed of trust for a second-home mortgage backed by Fannie or Freddie and used for most nongovernment backed second-home loans. “Borrower shall keep the Property available for Borrower’s exclusive use and enjoyment at all times.”
Curiously, a Fannie Mae spokesman says that the only thing that has changed from that seemingly restrictive language is the verbiage in the rider, not the terms themselves. The one-year limitation on rental restrictions isn’t new, he said, though it wasn’t mentioned in the earlier version of the rider. Customers, he said, were free to call Fannie Mae for further guidance if they chose to.Lenders providing loans backed by Fannie Mae are required to follow Fannie’s interpretation of the rider, said the agency’s spokesman; lenders using the rider for non-Fannie loans are free to interpret the rider as they see fit.
The new rider now clearly states that some renting is permitted. It says, “Borrower will maintain exclusive control over the occupancy of the Property, including short-term rentals.” Turning a property over to a management company, rental pool or timeshare arrangement that calls the shots isn’t allowed—a condition that was also clearly stated in the previous version of the rider. Even more significantly, the new version of the rider also puts a time limit on rental restrictions, saying that “Borrower will keep the Property available primarily as a residence for Borrower’s personal use and enjoyment for at least one year” unless other terms are negotiated and permitted in writing by the lender. After one year, the rider no longer precludes any kind of renting—including by a management company—and no permission needs to be sought, said the Fannie Mae spokesman.
Many lenders and mortgage brokers interpreted the old version of the rider to mean that borrowers who wanted to rent out properties—even for short-term rentals—needed to take out “investment mortgages,” which come at higher rates. Conforming second-home mortgages in 2018 had an average rate of 4.55% compared with 5.16% for investment loans, according to data analyzed by mortgage data and technology firm Black Knight. The difference was more muted for jumbo loans, with second-home mortgages averaging 4.26% and investment loans averaging 4.47%.“Lenders view investment property loans as riskier than second home loans, where the borrower themselves will occupy the house,” said Tammy Richards, chief operating officer of loanDepot, a large nonbank lender. Therefore, lenders believed that under the terms of the old rider, owners wanting to rent out their second home technically needed to take out an investment loan or refinance into an investment loan, Ms. Richards said before the rider revision.
Lawrence Jacobson, a Beverly Hills lawyer who provides expert testimony in mortgage

 banking and real estate cases, said that the rider has been “liberalized significantly” from its previous incarnation.Despite the strict verbiage in the old rider, borrowers were rarely, if ever, punished. “We are unaware of any mortgage in good standing being accelerated for violation of the rider alone,” the Fannie Mae spokesman said.“The people they are really concerned about are the people who never even intend to move in” and take advantage of lower rates for what is actually investment property, said Mr. Jacobson.
A few things to note about Second-Home Riders
1. Even before the revision, Fannie Mae said it was unaware of any case where just violating the Second-Home Rider triggered a foreclosure.2. The new rider makes clear that some renting in the first year of ownership is allowed as long as the borrower uses the property personally most of the time and remains in charge of the rental process.3. The new rider also makes clear that restrictions on renting—either short-term or long-term— are only in place for the first year. After that, borrowers don’t need to seek permission from a lender to rent out their properties, a spokesman for Fannie Mae said.


Matt M. , CA

Feb 05 2019, 04:20 PM

If you are the buyer, the type of loan also effects the amount and type of paperwork that you will need to provide as well as the amount of cash reserves that you need. Also a second home has geographical and size restrictions to it. Second home financing has a better interest rate, less paperwork to provide and easier underwriting you also need to purchase it within 75 miles or so of your primary residence and the second home cannot have more square footage than your primary residence.

Matt Malouf


Pamela S. Castle Rock, WA

Mar 08 2019, 09:00 PM

Thanks for reaching out. Nice to connect Daniel.