I have a friend named Liz who is currently attempting to purchase her dream lakefront cabin. She has faced many obstacles with regard to financing. I want to discuss a few of them.

First, let set the stage for this discussion. When I say lakefront cabin, I am referring to the financing (loan) of a lakefront property that is only intended to be used as a seasonal recreational property. This is in contrast to the purchase of a primary residence, where you will live and call home. The latter is easily financed as you live there and the bank knows that you don’t want to be “kicked out” of your home. Loan originators know that if you default on your recreational property, you will not be living on the street. So, financing is very different. Let’s compare:

Primary Vs. Recreational (lakefront) Property:

1) For a primary ,you can receive 100% financing without too much difficulty, at nearly all banks. Second home (Recreational lakefront) loan programs are much fewer. As of the time of the post, HSBC does not offer loans of this type (Liz tried!). Of the loan programs available, most originators require at least 20% down, and they will check to see if you saved it or borrowed it.

2) Primary residences are relatively easy to buy without much bank scrutiny. On a primary residence, loan originators will overlook a bankruptcy in your recent past (of course you will get a higher interest rate!). For a recreational property, If you find an loan originator (Cendent is the mortgage company I used (now called mortgage choices 800-446-0963), You are going to be scruitinized in reference to your income and credit. Loans on non-primary residences are considered risky.

3) On your primary residence, depending on your credit, you will get a competitive interest rate. The more risky loans, such as second homes (recreational-lakefront) the higher interest rates. Depending on your credit history, rates could be 5 points higher! This again makes financing harder as you have to qualify for a higher payment.

4) On your primary residence, you will find that many programs are available to roll your downpayment and closing costs into your mortgage. Not so with second home loans. Originators expect you to come up with more cash and take more risk.

5) Many Seasonal lakefront cabins will not meet the lenders requirements. For example, often seasonal places have no official heat source, no well (lake water is used) and even limited facilities (like a holding tank vs. a septic system). Some recreational properties have no “formal” road into them, and no address! Many lenders will not finance these properties. This begins to explain why many lakefront properties are substandard. That is because there were no loans prior to the 1980s. If you wanted to have a lakefront recreational property, you had to have the cash to purchase the property and build something - 100% of the cash!

Liz experienced some of these obstacles. In July of 2006 she made an offer on a lakefront property. She went to lending tree.com and connected with a mortgage company that consumed a month of her time and at the eleventh hour (after realizing that the seasonal cabin was heated with a woodstove and had no formal heating system), the lender dropped her. This was after saying yes all the way through! She has now found another lender, but was close to losing the property. The sellers had several back-up offers!

The best way to purchase recreation lakefront property.

Best way: Use 100% cash (cash is king!). That is what will always work. Figuring that the average lakefront lot (direct lakefront not lake access) is about 200,000 right now, minimal, that would eliminate many of us in the middle class! Who has 200 grand laying around!!

Next Best: Use a mix of cash and loan. Essentially, the better the loan to value ratio, the higher the chance that a bank will go with you. As an example, if you can put 30% down, pay your closing costs, then more then likely you would be approved for the loan. So, on a $200,000 lakefront property, you need about 63,000 down and closing costs, depending on the state (NY is expensive, Vermont is less expensive, good article on this at marketwatch.com), are about $10,000. So you would need roughly $73,000! Still a good chunck of change. Now remember, for $200,000, You are getting a cabin on 50 feet of direct lake front, that has an outdated kitchen and substandard facilities! If you want a “modern home” on a lakefront property (Yearend with heat $400,000+!!)

Minimal requirements: Here is the middle class families with kids and dogs! 20% downpayment (On $200,000 that’s $40,000), closing costs (on $200,000, that about $5-8,000), a great credit history (FICO score of 700 or above), Job stability (the longer at one job the better! {5 years?}), and a average middle class income (40-90k per year), and a persevere attitude!

Financially challenged!: Ok, I believe that if there is a will, there is a way. Planning is essential! It may take many months to several years. Action plan: Save money. You will need at least a 10% downpayment and closing costs. Improve your credit score, if you do not already have a FICO of at least 700. Research lenders. You can do this by talking to realtors at where lakefront property is more common. Learn their criteria and programs.

Read LakefrontPrportyinfo.com. Know what you are getting yourself into! You can do it!! Make your dream happen! Not just for you, but for your family and kids and grand kids! It’s a much better investment then stocks, bonds, rentals or anything else! Waterfront commands 50 to 100% premium! Waterfront is finite! Supply and demand. Do it now! Many lakes (Such as lake George), are only attainable by millionaires! But many beautiful lakes have property that can still be purchase by the middle class!! At least for now!

Thanks. The lakefront property nut!