Niemann Pick type C2 (NPC2) is a small sterol binding protein in the lumen of late endosomes and lysosomes. We showed recently that the yeast homologue of NPC2 together with its binding partner NCR1 mediates integration of ergosterol, the main sterol in yeast, into the vacuolar membrane. Here, we study the binding specificity and the molecular details of lipid binding to yeast NPC2. We find that NPC2 binds fluorescence- and spin-labeled analogues of phosphatidylcholine (PC), phosphatidylserine, phosphatidylinositol (PI), and sphingomyelin. Spectroscopic experiments show that NPC2 binds lipid monomers in solution but can also interact with lipid analogues in membranes. We further identify ergosterol, PC, and PI as endogenous NPC2 ligands. Using molecular dynamics simulations, we show that NPC2's binding pocket can adapt to the ligand shape and closes around bound ergosterol. Hydrophobic interactions stabilize the binding of ergosterol, but binding of phospholipids is additionally stabilized by electrostatic interactions at the mouth of the binding site. Our work identifies key residues that are important in stabilizing the binding of a phospholipid to yeast NPC2, thereby rationalizing future mutagenesis studies. Our results suggest that yeast NPC2 functions as a general "lipid solubilizer" and binds a variety of amphiphilic lipid ligands, possibly to prevent lipid micelle formation inside the vacuole.