Can You Qualify for 2nd Home Loans if You Rent Them Out?
You can obtain mortgage financing to purchase a home loan, and you can also use a cash-out refinance loan to extract equity from a rental property that you already own. However, the underwriting guidelines for loans tied to rental properties are usually much stricter than guidelines for loans on primary residences.
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Maximum Loan Amount
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When you buy a primary home you can finance up to 96.5 percent of the purchase price. However, when you buy a rental home, you can only finance 85 percent of the purchase price. If you refinance a rental home either to pay off a loan or simply to extract equity, you can only take out a mortgage equal to 75 percent of the property value. Similar loan-to-value restrictions apply for home equity loans although the LTV maximums vary from bank to bank.
Credit Score
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You can obtain a government-insured mortgage to buy your primary residence if you have a credit score of 580 or higher. You need a credit score of 620 or higher to take out a mortgage on a rental property. The 620 score reflects the minimum required by Freddie Mac, the government-sponsored entity that buys mortgages from banks. However, banks are free to set limits above the Freddie Mac minimum. On rental homes, many banks require credit scores above 680.
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Interest Rate
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Mortgage rates roughly follow the yield paid on the 10-year Federal Treasury bonds, and home equity rates roughly follow the United States prime rate. However, your lender adjusts the rate up or down based on risk factors including default risk. People experiencing financial difficulties are more likely to default on loan payments for a mortgage on a rental home than on payments on their primary home. Therefore, banks charge higher interest rates on loans for rental homes.
Right Of Rescission
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When you take out a home loan on a property you already own, federal regulation Z provides you with a three-day right of rescission. This means that you have the right to cancel your loan at any time during the three business days following the signing of the loan documents. However, regulation Z only applies to consumer home loans as opposed to business purpose loans. Most loans used to finance rental homes are classified as business loans because you are not financing a home in which you intend to live. Therefore, under regulation Z you have no right of rescission.
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