Buying a Second Home becomes more Challenging

A few years ago, many Americans leveraged their rising home equity to purchase second home or vacation home properties. Right before the real estate bubble burst, for example, most of the residential sales involved a second home. But that holiday home era is now a relic of the past.

Securing financing to invest in a second home was relatively easy just three to four years ago. Nowadays, however, coming up with the financial means to snag a vacation home is next to impossible-unless you have oodles of cash burning a hole in your pocket. Lenders are hurting, and they're passing their financial pain along to customers.

Tips for vacation home purchasers

To purchase a second home in 2009, borrowers need to show up with enormous down payments. On top of that, they need plenty of verifiable liquid assets to ensure that, even during hard times, they'll be able to make mortgage payments on time. Lenders are demanding cash reserves sufficient to cover both the primary and the second home, for example, for homeowners straddling two house payments. The reserves are usually equal to six months of principal, interest, insurance, and taxes for each home. That's more than most people can possibly bear, even in a healthy economic environment.

Second homeowners know cash is king

It may be astonishing, but surprising numbers of Americans can afford to pay cold cash to purchase second homes.  Almost half of all investment buyers, and about 30 percent of typical vacation homebuyers, still pay cash for those second homes, according to studies conducted by the National Association of Realtors (NAR). The NAR found that many of these vacation home purchases were made as a way for investors and individual consumers to diversify their asset portfolios. But in this era of frightening economic uncertainty and global financial turmoil, it's hard for many Americans to believe that people have cash that they're willing to convert into holiday homes.

There is a method to the seeming madness, however, and that's mainly explained by the extraordinarily cheap prices at which vacation homes are selling. In many of the most desirable regions of the country-like Florida's coastline, for example-upscale homes that were offered at a million dollars a few years ago are now going for less than half that price. Condos that can be purchased for $100,000 today were worth three times that much just two to three years ago, and those who can afford to buy are grabbing the real estate investment bargains at super low interest rates while the good deals last.

Home equity loan cutback

There are challenges, though. Lenders are now cutting back on home equity lines of credit, one of the most popular sources of financing for second homes. The FHA is also limiting affordable loans to primary residences, and private mortgage insurance to supplement loans with lower down payments is practically extinct. While vacation homes may be a sound investment, they're difficult to finance with borrowed funds.