The National Association of Realtors reported that nearly 1/3 of all homes sold in 2005 were second homes. A record number of second home sales, and 2006 is expected to be nearly as strong! So why are lenders so critical about second home lending? Often requiring higher rates, larger down payments and more diligent underwriting for second home buyers?

Second homes by nature require higher debt-to-income ratio allowances, because the buyer/borrower must be able to afford 2 homes. The taxes, insurance and maintenance that comes alongs with the privledge of multiple home ownership is considered additional risk.

Lenders beleive that if a buyer is going to default on a mortgage, they will default on a second home, and then their primary. So again they consider second homes more risky.

Second homes often have unique features, like unique design (log homes, unconventional floor plans) or unique locations. The location of second homes can make it hard for lenders to obtain proper appraisal comparable sales - because they are often in rural or less than active real estate markets. Or second home can be in higher risk locations - flood plains, earthquake zones, lava flows.

What makes a second home desirable and special is often what makes it hard to mortgage.

Lastly, second homes are often used as both personal use and as a rental property. The risks of rental property includes liability, management hassle and expense, and loss of rent risks. Will a borrower default if he cannot rent his second home?

For all these reasons, lenders who want to serve this market need to specialize in second home mortgages and fully understand the risks of vacation home lending.