How to Get a Home Equity Loan on a House You Are Renting Out

Obtaining a home equity loan on a rental property can be more difficult than getting one on an owner-occupied property, as some banks and lenders do not make home equity loans for rental properties. Different loan options are available, each with their own advantages and drawbacks. For example, interest-only loans offer lower payments in the early years of the loan, with much larger payments later in the loan life. Adjustable-rate loans change based on the national interest rates, so monthly payments can rise and fall throughout the life of the loan. Fixed-rate loans are the most stable, as they provide equal payments throughout the life of the loan.

Step 1

Find lenders that will allow home equity loans on rental properties. Some banks just don't allow home equity loans on rental or investment properties. Once you find several, consider which you might want to work with based on how you feel about their underwriting process, requirements and interest rates.

Step 2

Provide information on your current mortgage loan, if you are carrying one. The home equity loan will act as a second mortgage if you have a current loan, and you will have to prove your ability to pay both loan payments.

Step 3

Provide a copy of a current credit report. Alternatively, you can authorize the lender to run your credit themselves. Although the equity in your rental property will serve as collateral for the home equity loan, you will still need to prove your creditworthiness. Additionally, the better your credit is, the better the rate you will be able to get on the home equity loan.

Step 4

Demonstrate that you hold more than twenty percent equity in the rental property. Most lenders cap the amount of an equity loan at 80% of the home's equity as protection against falling house prices. In other words, the amount of the equity loan plus the balance of any existing mortgage cannot be greater than 80% of the home's current fair market value.

Step 5

Provide a current home inspection and appraisal to the lender, if requested. You will likely have to arrange and pay for these yourself, but doing so can provide proof of the current home condition and value, and make it easier for you to get the home equity loan.

Step 6

File all paperwork in a timely manner and follow up with your lender to make sure that all their requirements are being met.

Items you will need

  • Credit report
  • Current loan documentation

Tip

  • Look at multiple lenders to see which is able to provide you the best rate.
  • Consider your intentions for the home when you are choosing your loan type. Unless you are planning on selling the property in the near future, a fixed rate loan is generally more cost effective.

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