Vacation rental financing

[Matt B.]

I am looking to purchase a vacation home/investment property in Rhode Island. I am currently in NY, my initial idea was to use home equity loan or LOC from my current home for the down payment. 1. Is this a good idea? 2. Should I use a bank in NY or RI for the loan/financing? Any one have any recommendations for lenders etc. in the Narragansett area? Thanks in advance...

[Julie McCoy]

Banks are not going to consider short-term income when they evaluate whether or not to give you a loan, unless you have it established on two years of tax returns on Schedule E.  So, make sure your debt-to-income ratio is going to support the mortgage, regardless of what you use as a down payment.

As for using a HELOC or LOC as the down payment, consider the risks just as you would if you were using them for any other kind of property purchase. Personally, I wouldn't; too much expense/risk for my blood.

As for which bank, in my experience it doesn't matter where they're located - my first VR was financed through an online lender who I had a great experience with (piles of paperwork, though).  My second VR was financed through a small local bank - which was located in a totally different part of the country from the house!  But, if you're looking for flexibility in terms, you probably want a bank local to the property you're buying (RI, in this case).  Shop around, don't rule anything out just because they're not in the area.

Good luck!