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Buying a beach house? Bring Cash.

Vacation homes are becoming affordable again. Trouble is, getting a loan for one is harder than ever.

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By Gerri Willis, Money Magazine contributing writer

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Gerri Willis is host of CNN's Open House. Write her at real_assets@moneymail.com.
What's tougher
With credit tighter, financing a second home is much harder than it once was.
More Cash Up Front
Plan to put down 10% to 30% and to have as much as six months of housing payments in reserve.
Higher Rates
Youll pay about one percentage point more than you would on a first-home loan.
Fewer Funding Options
With home-equity rates at 8.2%, your primary home is no longer a low-cost source of spending money.

(Money Magazine) -- Dreaming that falling real estate prices have finally brought a vacation home within reach? Could be.

After years of double-digit growth, prices in popular spots like the Florida Keys and Palm Beach have dropped 10 percent over the past year, according to Fiserv Lending Solutions. Home values in beach markets like Cape Cod and Cape May, N.J. and mountain destinations such as the Berkshires in Massachusetts have also started to turn down.

Of course, the ugliness may not be over in every beauty spot, says Celia Chen, director of housing economics at Economy.com. In Phoenix and Fort Lauderdale, for example, her firm is projecting 12 to 20 percent price drops from the peak - but much of that decline is still to come in 2008.

The best deals may be in destinations that buyers overlooked during the boom, says Christine Karpinski, author of How to Rent Vacation Properties by Owner. Those include the Adirondacks in New York, the White Mountains in New Hampshire, the Great Smokey Mountains in Tennessee and the Florida Panhandle. "The opportunity is awesome as long as you buy in the right places for the right reasons," she says.

But just as the window is starting to open on vacation-home prices, another one is slamming shut: financing. The mortgage crisis has sapped the confidence of once eager lenders. When you set out to pay for a second home today, you'll have to work within these rules:

Show them the money, and lots of it

At the height of the mortgage craze, lending guidelines were so loose that a down payment was seen as optional. Not anymore. You'll need to put down at least 10 percent and more likely 20 to 30 percent to nab your beachfront or mountainside prize.

"You can still buy a primary residence with 5 percent down. But getting the best terms on a second home requires much more," says Greg McBride, senior financial analyst at Bankrate.com.

What's more, forget raiding the equity in your first home to get the cash for your second one. Even with rates on second-home mortgages about a percentage point higher than those on first-home loans, that's still less than the punishing 8.2 percent you'll pay on a home-equity loan today.

Really, show them your money

For lenders the mantra today is don't trust, verify. Stated income loans, popularly known as liars' loans, are history. Expect to be asked to produce proof of your income. When it comes to affordability, lenders want to see that you earn enough to sustain payments on two loans - and don't want to see your total housing payments (first and vacation) top 40 percent of your income. At the height of the boom, that cap was more like 55 percent.

On top of that, says Michael Lefevre, chief executive of the National Association of Mortgage Professionals, you may have to show that you have six months' worth of home payments in reserve in case you lose a job or have any kind of financial calamity.

Back up your claims

If you need to rent out your home to afford it, count on lenders taking a hard look at how much you plan to charge. You may have to spend $500 to $1,000 for an appraiser to do a rental analysis to make sure your assumptions are reasonable.

Also keep in mind, says Lefevre, that lenders will figure that a quarter of your rent will go to upkeep, not your loan payments.

Make it a permanent vacation

When you borrow, think about long-term affordability, even into retirement. No one really knows when vacation-home values will hit bottom. You can't count on price gains to bail you out of an expensive loan.

"This isn't the kind of market where you can flip and make millions," says Karpinski. Even so, if you land financing, it may be the kind where you can find your dream house.  To top of page

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