Q) Is it possible in today’s financial climate to borrow money to rebuild or remodel your cabin?

A) In 2008, the United States was hobbled by a financial crisis widely seen as caused by loose lending in residential mortgages. Seven years later, banks, in part due to regulation reform that came as a response, have tightened the requirements would-be homeowners must meet to qualify for mortgages. What does that mean for anyone interested in seeking financing for a second home or for a significant remodel of a cabin or cottage?

Financing a second home has always been a bit more difficult than getting a mortgage for a primary residence. And cabins, which don’t always meet current building codes or are only habitable three seasons of the year, face particular obstacles when it comes to financing, our experts say. While Americans can often lock in interest rates for residential home loans, that’s generally more difficult to achieve with secondary homes.

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“Financing a second home is going to be more difficult, and the more unique and rustic the property, the tougher the financing is going to be,” says Greg McBride, chief financial analyst with consumer financial services company Bankrate.

“At the very least there will be a higher down payment and likely a higher interest rate” says McBride.

“The reason for that is because when times get tough, people will make the effort to pay a mortgage on their primary home, but not necessarily on their second home. Factoring in the uniqueness of a cabin is only going to exacerbate that.”

While it was too easy a few years ago to obtain a mortgage, it subsequently became much more difficult. That pendulum at the moment is closer to a more reasonable middle, he adds.

“That is, for principal residences, it’s largely in the middle,” he says. “For second properties, it’s just a little more restrictive because the appetite for risk is not there.”

Tom Koerber, senior vice president of Northview Bank in Finlayson, Minn., agrees. He says that it helps to find a lender who understands the area where a cabin resides.

“Mortgage companies do a fairly good job financing straightforward properties,” Koerber says. “The problem is that a lot of properties along the lakes or in northern Minnesota, for example, are a little more unique. That’s when it’s important to find a lender who knows the area and maybe specializes in mortgage financing.”

Northview Bank, for example, is familiar with how common fishing or hunting cabins are in parts of Minnesota, Wisconsin, Iowa, and the Dakotas. But even lenders aware of comparable cabins in an area might need to charge a higher interest rate because they aren’t able to get the most advantageous rates themselves on those properties.

“Maybe a house doesn’t have a sewer in it; we can finance that,” Koerber says. “Log cabins sometimes can be a little more difficult to finance. You must do an appraisal — banks are supposed to use comparable sales, and for log cabins that can be, for some lenders, a little tougher piece to work with. We work with enough of them — we’ve kind of specialized in that also.”

In addition to finding a lender who understands the area and the status of the cabin, ask yourself key questions about why — and even whether — you want to take on debt for that second residence, says Pam Dumonceau, president of Consistent Values Inc. in Greenwood Village, Colo.

“As a financial planner my first goal is to make sure that a client’s biggest financial goals are on track to be met — maybe not already met, but on track,” she says. “People oftentimes want a second home because they want to make memories with their kids and grandkids. They want to spend time in those places of beauty where that second home is.”

That often means that buyers interested in buying or significantly remodeling a cabin don’t factor in other costs, experts say.

“They don’t think about how they have to maintain it, and winterize it, or the financial upkeep,” Dumonceau says. “The second home is a sentimental property that has a lot of emotional impetus. That’s totally okay as long as people are empowered to understand the decisions they have to make.”

Buy a turnkey dream cabin or take a chance on a fixer-upper?

The question is a financial as well as an emotional one. In addition to the idiosyncrasies of a cabin and its location, banks will be interested in the appraised value after a remodel, says Tom Coronato, a construction loan specialist at Citizens Bank in New Jersey. That means doing your homework about what the cabin requires and what it will be worth in the end compared to nearby homes.

As you explore your options — whether you’re looking to buy a fixer-upper or a cabin that’s ready to go, or to buy land and build from scratch — it pays to find a lender familiar with the area.

“If someone finds a seasonal cabin, maybe one they currently own or want to buy, and they like the location, but maybe it needs an extra bedroom or they need to fix a central heating issue, we will do a combination purchase and construction loan,” says Tom Koerber, senior vice president of Northview Bank in Finlayson, Minn. “Say you buy it in June, you have contractors come in July, August and September to fix it up.”

An initial construction loan may be more expensive or will have an adjustable rate mortgage, but a final loan can be had once work is complete. Coronato suggests going to a local builders’ association, which can refer reputable builders who will give true estimates of what a cabin needs to be considered a three-season or four-season dwelling. That will help determine the financing required for the job and let the bank know how much the final product is worth.

“The ones that are tough are emotional,” he says. “Home buying is 90% emotional, but you have to take the emotion out of it to really get the facts. As a lender, how close can I get to the after-improved value, that future value that we can determine today?”
–Daphne Howland