How Mortgage Applications for Vacation Homes Spiked Early in the Pandemic
Nicole Bachaud
6 min read
Vacation home applications increased nearly 30% between 2019 and 2020.
The counties with the highest share of home purchase applications accounting for vacation home applications were Kane County, Utah, Nantucket County, Mass., and Grand County, Colo.
The median value of vacation homes sought by applicants was 25% more than for those seeking primary homes, but vacation home applicants also had more than twice the median household income as applicants for primary homes.
Mortgage applications for vacation homes rose almost 30% from 2019 to 2020 as many home buyers likely sought to take advantage of flexible working arrangements in the early phases of the pandemic, according to a Zillow analysis of 2020 data from the Home Mortgage Disclosure Act (HMDA).
Perhaps unsurprisingly, applications for vacation homes were highly concentrated around coasts and mountain ranges in 2020, as those who could afford a second home looked to spend more time soaking up the sun or hitting the slopes. The counties with the highest share of home purchase applications accounting for vacation home applications were Kane County, Utah, Nantucket County, Mass., and Grand County, Colo.
But while more borrowers clearly were willing to try their hand at getting a loan for a vacation home, the process itself remained more difficult than for buyers of primary residences. The minimum down payment accepted by many mortgage lenders on vacation homes is typically 10% – 20%, helping to explain why the typical down payment for vacation home applications was 20% across age groups – higher than the median for all buyers. There are also often higher credit score requirements and lower debt-to-income thresholds.
Still, more people are finding ways to make it work. The median value of vacation homes sought by these applicants was 25% more than for those seeking primary homes, yes – but vacation home applicants also had more than twice the median household income as applicants for primary homes – $170,000 vs $79,000. It's also worth noting that applicants for vacation homes skew much older than applicants for primary homes, with the majority of second home applications coming from Gen X and Boomers. Around 70% of vacation home applications were from applicants aged 45-74 and only 27% of these applications were from applicants under 44. In comparison, 66% of primary home applicants were under 44. Younger buyers who did apply for vacation home mortgages were doing so on less-expensive properties. The typical property value for applicants under 25 was $195,000, compared to $355,000 for applicants aged 35-54.
The disparities don't stop at age. There are also haunting differences apparent in the racial breakdown of vacation home applicants. Only 2.3% of all vacation home purchase applicants were Black in 2020, or a meager total of just 7,628 applicants nationwide. This compares to the 222,096 applications coming from white applicants – 68.2% of all applicants. And Black vacation home applicants applied for homes worth roughly the same as the median home for Black primary home applicants ($235k).[1] Applicants of other races applied for more-expensive vacation homes (applicants overall applied for vacation homes valued at $345k compared to primary homes valued at $275k). And even though there are so few Black vacation home purchase applications and they are for relatively cheaper homes, the denial rates were still astonishingly high compared to denial rates overall. Black vacation home applicants were denied 18.5% of the time, compared to 7.9% for all applicants and 6.6% for white applicants.
Another consideration for buyers shopping for vacation homes is the recent increase in upfront fees from Fannie and Freddie. This new fee addition ranges from 1.125% – 3.875% of the entire value of the loan, not a small sum given the median loan value for a vacation home in 2020 was $255,000. This fee increase could add anywhere from $2,870 to $9,880 in upfront costs for a vacation home with a loan of that value – potentially adding height to an already high hurdle for those that struggle to save a down payment and other upfront costs, particularly first-time buyers and buyers of color. And given the rapid rise in home values since 2020 (the latest year for which data is available), the overall effect of this fee on today's buyers is even larger.
Investment properties
Rapidly increasing home price appreciation over the last year and a half intuitively should have translated to an increase in purchasing investment properties, since the return is highly favorable. But the HMDA data doesn't tell that story. Between 2019 and 2020, there was actually a 6% drop in the number of investment home mortgage applications. This doesn't mean that there were fewer people buying investment properties, rather, there were fewer people buying investment properties with mortgages. The rise of the cash buyer has sidelined many would-be novice investors who need to meet the strict investmentment property mortgage guidelines.
Much like vacation homes, investment home mortgages have more requirements compared to primary home mortgages. The typical down payment on investment property applications was 25%, matching exactly with the minimum down payment required by many investment home mortgage lenders. But the good news is that investment properties are typically less expensive than primary homes and much less expensive (around 50% less) than vacation homes – investment homes are often more run down or in need of repair, representing a bargain for investors looking to fix and flip. So the bar is lower for people to get into second-home ownership via an investment loan instead of vacation loan — if they can win the bid.
The typical investment property applicants had a higher income than primary home applicants in 2020 ($132k compared to $79k), but the property value for the typical investment home application was 14.5% less than a primary home. And unlike vacation home applicants, investment applicants are more likely to skew younger – with almost half (44.7%) of investment property applicants under 44. And denial rates are fairly similar across ages (with the exception of applicants under 25, who had a 13.7% denial rate compared to 9-10% for other age groups).
[1]With the exception of Asian applicants, who applied for much cheaper vacation homes ($385k for the median vacation home value compared to $435k for the median primary home value). This is likely due to the fact that Asian households are more likely to live in higher cost metros with higher home values, and many mortgage lenders require vacation homes to be a certain distance away from the applicants' primary residence, which would be in lower cost areas. So it is likely that Asian vacation home applicants are applying in less expensive areas.
