Even when mortgage credit is easy to come by—and it still is not—the standards for vacation homes and restoration projects are tougher than for the purchase of a primary home.
Get a loan. For a conventional vacation home, plan on putting at least 20% down and paying an interest rate on the mortgage that’s typically a little higher than for a first home. For a reconstruction project, go to a bank with a detailed plan, projected costs and a schedule, and try to work out an arrangement in which the lender monitors the progress and funnels you the money as you go. These are not permanent mortgages, however; they are short-term or bridge loans. You can refinance into a permanent mortgage when the work is completed. The interest rate on a construction loan will be a few percentage points higher than on a permanent loan, though the interest may be deductible.
Take a tax deduction. You're limited to deducting interest on no more than $1.1 million in principal for primary and vacation homes combined. You can rent your place for up to 14 days a year and pocket the rental income without having it on your tax return. If you rent it out for more than 14 days, the IRS considers you a landlord.