There are many advocates for different types of finishes for musical instruments.  In the violin world, only handmixed varnishes (spirit and oil) are accepted.  However fretted instrument makers have been free to choose from a variety of finishes.  Most professional luthiers use nitrocellulose lacquer.  These are hard and can be buffed to a glossy shiny finish.  However they require spraying equipment since the lacquer thinner fumes are toxic.  There is also an entire new set of vocabulary to deal with lacquer problems, such as fish eyes, orange peels, etc.

 

Being a home based maker, I decided that I needed a finish that was easy to use, as well as preserve the instrument's wood and not interfere with the sound quality.  Oil finishes are easy to use, but they soak into the wood and there are luthiers who think this deadens the sound.  Polyurethane does not preserve well, yellows and cracks, and is hard to touch-up as well as has a plastic look.  Shellac, spirit varnishes and lacquers are hard to use, since they are subject to brush marks, fish-eyes, blushing and other problems when brushed on by an amateur.

 
Waterlox & Shellac

So I settled using a product called Waterlox with a washcoat of shellac. Waterlox is basically a thinned varnish, and not an oil finish.  It is made with tung oil and phenolic resin, but the oil has already been chemically combined with the resin to form a varnish.  Therefore it will protect the wood surface without soaking into the wood.  Nevertheless I still use a shellac washcoat to even the wood out, knocking down the raised grain and sealing the wood.

The shellac washcoat is thinned to 1 lb cut with denatured alcohol, so that it can be easily applied.  I brush on an extremely thin coat, making sure to watch and wipe off any drips and runs immediately with an shellac dampened paper towel.  Then I lightly sand down the raised grain, and repeat until I'm satisfied.  The purpose of the shellac is to seal the wood and reduce blotchy, uneven application of the next layers of varnish.  Shellac is also an effective sealer, but truth be told, Waterlox is also an effective sealer and will not soak into the wood, being that it is thinned varnish.

 

Next I apply several coats of Waterlox Original Sealer/Finish.  Waterlox will protect the shellac, being waterproof, as well as resistant to alcohol and sweat.  I chose Waterlox because it is extremely easy to use, self-levels, and dries relatively quickly but not too quickly.  This means I have time to brush it on, and not worry about bubbles or brush marks.  The first coat will self-level as it dries and brush marks and bubbles disappear.  I then lightly sand with Steel Wool or 600 to smooth it between coats and wipe on 4-6 more coats.  You can dispense of the brush entirely by wiping on all coats, but then you will need to wipe on 3 coats for every one brushed coat.  Waterlox also doesn't require sanding between coats for adhesion, and since it dries quicker than other varnishes, very little dust or lint gets stuck on it.  The original Waterlox formula gives you a semi-glossy to glossy finish. You can get it as glossy as you want by applying more coats, or you can knock down the gloss by sanding it with 1000 grit.

 

The drawbacks of Waterlox is its high mineral spirit content, noxious smell and ability to give you headaches if you don't wear a respirator.  Another drawback is that it will quickly gel up in the can, so I put marbles into the can to keep air out of the can as much as possible.  It is also expensive, but I believe it is worth it for the hardness, water resistance and beauty it imparts.

 

For a beginner, the Waterlox over shellac washcoat is about as foolproof as it gets. 
A few safety warnings:  Work in a well ventilated area, wear a respirator and gloves.  Also, beware of the oil-soaked rags which can start a fire spontaneously (due to the exothermic reaction of a drying oil which heats up as it dries).  Do not just toss them in the trash or leave them heaped up or balled up in the corner somewhere.  Instead, spread them out in a single layer over concrete to dry, or put them in a glass jar filled with water and put the cap on.  The key is to either let them dry flat on nonflammable material like concrete (not bunched up or squished together), or to deny them any oxygen to react with.


Tru-oil, Shellac, and Minwax Antique Oil
If the odor and noxious gases of Waterlox makes you nauseous, here is kinder, more gentler way of finishing your dulcimer and still get great results.  Browse any guitar forum and you will find discussions of luthiers using Birchwood Casey Tru-oil.  It is basically polymerized linseed oil that will build up to a hard glossy finish.  I personally don't believe the final finish is as hard as Waterlox [one of the uses of Waterlox is for floors].  But Tru-oil will be plenty hard enough for a musical instrument.

I apply a few washcoats of shellac to seal the wood, sand down any raised grain and prepare a nice surface.  Tru-oil is thicker than Waterlox and not meant to be brushed.  Therefore I wipe it on with a lint-free cloth, or with my fingers, or even a 600 wet-dry sandpaper strip.  It tacks up faster than Waterlox, so work fast, or thin it with a small amount of Minwax Antique oil [be careful not to thin it too much, or you will lose hardness of the final finish].  Do not leave any oil pooled anywhere and watch for any runs or drips.  Wipe with your rag in large movements so that the oil is spread evenly and thinly.  Leave for at least 12 hours between coats, and in the later coats, 24 hours between coats.  Remember to use thin coats, up to 8-10 to get a smooth even gloss.

Grain filling can be achieved by gently sanding on the 2nd, 3rd and 4th coats by using a strip of 600 wet-dry sandpaper as the applicator.  Once the surface is smooth and fine, you can then build up layers to your final gloss.

The warning about combustible rags applies to this finishing method also.  Be sure to dispose of your rags in a safe manner.  One of my coworker's uncle burned down his garage after they were refinishing a table with linseed oil.  They all threw their rags into a bucket and left to go to a local baseball game.  While they were at the game, they saw fire engines rushing towards their neighborhood, and then the neighbors told them their house was on fire.

Incidentally, if you're on a camping trip and need a fire-starter, just bring a can of linseed oil and some rags.