The downside of having a vacation home is that when you apply for a mortgage on your primary residence, the lender counts the monthly loan payment, property tax, homeowners insurance and any applicable HOA dues for the vacation property as debt.
Including the monthly housing expenses for the vacation home in your debt-to-income ratio can make it significantly more challenging to qualify for the mortgage on your primary home or reduce the loan amount you can afford. In short, you need to make enough money to afford two mortgage payments instead of one, plus any monthly payments for credit cards as well as car, personal and student loans.
Although you typically cannot lower the expenses for a home such as your mortgage payment, property tax and homeowners insurance, there are steps you can take to offset these costs and increase the mortgage you can afford. The best way to limit the potential negative impact of a vacation property when you apply for a mortgage on your primary residence is to demonstrate any income generated by the property.
If you can show the lender that the vacation property produces rental income on a consistent basis then the lender may include that income in your debt-to-income ratio, which increases the mortgage you can afford. For example, if you own a vacation property with $3,000 in total monthly housing costs that generates an average of $2,500 in monthly income, it is much easier to qualify for the mortgage on your primary residence.
In order to include rental income from a vacation property when you apply for a mortgage, you are usually required to provide the Schedule E from your tax returns for the prior two years to verify the income. In some cases lenders may use the lessor of 75% of the income according to a signed lease agreement or the income according to a rental property appraisal report, but this method usually applies to an investment property as opposed to a vacation or second home.
Lenders typically average the rental income for the property over the prior to years to determine the income to include in your debt-to-income ratio. For example, if the property generated $30,000 in income last year and $20,000 in income the prior year, the monthly rental income attributable to the property is $2,083 ($50,000 / 24 months = $2,083 per month). The lender adds this rental income to your personal monthly gross income to determine the mortgage you qualify for.
It is important to highlight that because lenders average the rental income over a two year period, the income does not need to come from an annual lease. So if you use the property as a vacation home part of the year and rent it out when you are not using it, you can use that part-time rental income to qualify for a mortgage. This also means that income from Airbnb, VRBO or other short term vacation rental platforms can be included in your mortgage application as long as you have two year track record and the documentation required to confirm the income.
To summarize, although there is usually little you can do to lower the costs associated with a vacation property, you can include income from the property to balance out the expenses. In an ideal scenario, the rental income improves your debt-to-income ratio and helps you qualify for the mortgage you want on your primary residence.