By Jeannine Mancini Updated June 21, 2022
A home equity loan is often referred to as a second mortgage. Homeowners borrow money by using the equity in their homes as collateral. It is possible to obtain a home equity loan on a rental property, provided you qualify. Although you can borrow up to 100 percent of the equity in your primary home, lenders generally limit the amount you can borrow on a rental home, says The Wall Street Journal.
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Calculate your loan-to-value ratio. Your LTV is the appraised value divided by the balance remaining on your loan. Equity requirements vary among lenders. Generally, the minimum LTV ranges from 65 to 80 percent, reveals the Hecht Group.
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Review your credit report. Verify the information is current and accurate. Pay off any negative accounts or write an explanation letter. A good credit score allows you to lock-in at the lowest interest rate. If your credit is not perfect, it is still possible to obtain a home equity loan.
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Gather financial documentation, including recent pay stubs, W-2s and, if self-employed, form 1040s. Lenders will want proof you can afford to make the loan payments along with your mortgage payments. A second home means twice the expenses and twice the risk for lenders.
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Compare loan options. equity loan terms are shorter than a mortgage. Most terms range from five to 20 years. For a long-term investment home, you might want a fixed interest rate. If you are planning to sell the home, consider a variable interest rate. Evaluate the interest rates, terms, fees, and prepayment penalties. To minimize the impact inquiries will have on your credit report, limit your rate shopping to a 14-day window.
