How do I Get a Home Equity Loan on a Rental Home to Buy Another House?

Obtaining a second loan on a rental property is difficult.

Mortgage lenders are a bit wary in the wake of the 2008 credit crisis. The lending heyday in the late 1990s and early 2000s led to a huge number of foreclosures, defaults and "underwater" properties. Therefore, many lenders have tightened their guidelines for mortgage lending. One of the guidelines that was strengthened is loan to value (LTV) ratios. This is especially important with regard to rental properties because LTV guidelines, even in the lending boom, were fairly strict. It is possible to get an equity loan on a rental property.

Things You'll Need

• Mortgage documents for the rental property
• Recent appraisal
• Income documents (lease agreements, bank statements, pay stubs, tax returns, W-2s)
• Homeowner insurance policies

Instructions

1. Pull your credit report before looking for equity loan lenders. A poor credit score will likely disqualify you from all equity loan programs on a rental property. These loans are risky and lenders want only consumers with sterling credit. Visit Annual Credit Report (annualcreditreport.com) for a free report. You can also pay for your three-digit FICO score.

2. Find a recent appraisal on your rental property or order one yourself. You can get an estimated value from an online source, but this is not acceptable for lending purposes. A full appraisal will tell you how much equity you have.

3. Calculate your rental property's loan to value ratio (LTV). To do this, divide the sum of all mortgages on the property by the value of the property. For example, if the rental property is worth $400,000 and you have a $350,000 mortgage, your LTV is 88 percent. This does not mean, for the purposes of the loan you seek, that you can get a $50,000 equity loan.

4. Look for lenders in your area. Your best bet is mortgage brokers, not local banks and credit unions. Mortgage brokers work with a wide range of lenders and can offer many options, both conventional and "exotic."

5. Ask all potential lenders about their LTV guidelines. There is no need pursuing a loan with a lender if you cannot meet their guidelines. Many lenders have very strict cutoffs. For example, all rental property mortgages insured by the Federal Housing Authority cannot exceed 70 percent LTV.

6. Calculate how much of an equity loan you can take out. For example, say your rental home is worth $400,000 and you have a $200,000 mortgage. If the LTV cutoff is 70 percent, you can obtain an equity loan for $80,000.

7. Fill out equity loan applications with three or four prospective lenders. Make sure to offer all income documents and value documents. This will help speed the underwriting and pre-approval process. It will also get you some loan offers quickly.

8. Choose an equity loan lender. Make sure the program fits your goal of purchasing a new home. The amount of the equity loan may need to cover a down payment, home improvements, closing fees and real estate and broker commissions.

References

• FHA Home Loans, FAQs
• FHA Mortgage Lending Blog: FHA Revises Policy for Loans and Rental Properties
• Housing and Urban Development: Buying a Home

Resources

• Zillow: Online Property Valuation
• Annual Credit Report