Many Americans today are thinking of purchasing a weekend cabin they can drive to in a few hours or perhaps a second home several states away from their current residence. But obtaining financing for a second home can sometimes be a bit frustrating and intimidating.

That need not be the case. If a second home is in your future, here are the financing facts you'll need to talk about with the lender to obtain the loan you need.

The first thing you should realize is that the lender views loaning money on a second home somewhat differently than financing your primary home. The rationale is that since you have a primary home, should a “push come to shove” money crunch emerge, you might forsake making payments on the second home to preserve the equity on your primary residence.

That's why most qualifying and underwriting guidelines are stiffer for second-home loans.

Additionally, the secondary market where the lender sells the second-home loan has different requirements to qualify second-home borrowers.

Let's review them.

Although qualifying varies from lender to lender, most second-home loans require a 20 percent down payment. This is true for both an existing home and for a new second home that you plan to build. And the 20 percent down applies to both fixed-rate and adjustable-rate mortgages.

It's often tougher qualifying for a second-home mortgage because the lender will count not only your long-term revolving and installment debt (like credit cards and car loans), but the payment you're making on your first mortgage as well. This often disqualifies the potential borrower or at least minimizes the amount for which a borrower may qualify.

There is one leverage tool that might give you the extra edge you need. You could combine a 75 percent first mortgage (with a 10 percent down payment) and ask the owner to carry back 15 percent of the purchase price as seller financing or obtain a second mortgage from the lender.

This is allowed by the secondary market that purchases second-home loans and will allow you to sidestep private mortgage insurance (PMI) because your first mortgage is less than the 80 percent loan generally requiring PMI. In addition, you can probably save a bit on interest by selecting a 75 percent loan over an 80 percent and negotiating the repayment terms with the seller.

By knowing what the lender will require as well as using creative combinations of traditional and second mortgage financing, you should be well on your way to financing the second home you've been dreaming of.

Published: December 8, 2000

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Julie Garton-Good, DREI “The Frugal HomeOwner™” As a syndicated newspaper columnist, author and international speaker, Julie Garton-Good DREI, C-CREC™, is called “America’s Home Affordability Expert”, addressing more than 25,000 persons annually on topics of real estate industry trends and home affordability. She is the author of five real estate books and is the sole two-time recipient of the international "Real Estate Educator of the Year" award from the Real Estate Educators Association. In 1997, The National Association of Realtors® nominated Julie as one of the fifty most influential people in the real estate industry. She shared the list with only three other women.