Let’s explore how to rent out your home. Plus, consider whether or not this option is the right fit for your finances and lifestyle.

In this article:

• Should you rent your house?
• How to afford two homes
• Tips to rent your home
• Lending rules
• Pros and cons
• Property managers
• Being a landlord
• House rental FAQ

Should you rent out your house?

Should you rent out your current home to buy again? Figure out the tax implications, whether you qualify, and even the emotional attachment to your home.

“Becoming a landlord can be intimidating if you’ve never done it,” says Phil Peterson, managing broker at RE/MAX in Schaumburg, Illinois.  “There are definitely pros and cons to renting out your house. I’ve been there. But at the time, I wasn’t aware of all those ups and downs.”

Peterson says the situation really depends on the price of your house and what you paid.

How to afford two homes

Before we continue any further, you may be wondering how on earth you can afford two homes. You’ll need to evaluate your finances to determine if your budget can handle another home.

Down payment options for a second home

There are a few options for sourcing the down payment for a second home. First, you can always use savings to purchase a second home. But if you don’t have a down payment in the bank, it doesn’t mean you can’t buy a second home.

Another option is a cash-out refinance or Home Equity Loan or HELOC on your existing home to cover the down payment on your new home. This can be a good option but keep in mind that this will reduce your equity in your current home. Plus, if your current home is still mortgaged, you’ll be responsible for a second monthly mortgage payment.

Loan type options for a second home

If you have the down payment covered, the next step is to find funding.

Conventional loans can be a great option. You’ll need to meet some financial requirements that include having a good credit score and the income to support this new home purchase.

Government-backed loans can be used to purchase a second home but note that most require the financed home to be your primary residence so you’ll need to plan to relocate to the second home (and you’ll likely need to demonstrate a good reason to be moving out of your existing home).

Tips to turn your home into a rental property

Ready to turn your home into a rental property? Here are some tips to help you move forward.

Consider your emotional attachment

Peterson says that another scenario that many people don’t take into consideration when renting their old house is the emotional attachment they have to it.

“This house was your home. Your children grew up there. Your memories are there. So all of a sudden, you have these really nice tenants, and they move out in a few years,” he says.

When you go inside to take a look at it, you realize that these nice tenants didn’t take care of the home the way you did. There are stains on the carpets, and scratches on the wall.

“That emotional attachment to that particular house is very hard to overcome. But if you just buy an investment property that you never lived in yourself, then it just strictly becomes a numbers game — an income-producing building,” Peterson says.

Read the fine print of your mortgage

Many lenders will allow you to rent out the house while you still have an outstanding mortgage balance, but not all of them. 

Take the time to read the details of your mortgage agreement. If you have questions, reach out to your mortgage lender to uncover the rules. You don’t want to violate the terms of your mortgage agreement. If you do, you could face legal consequences. 

The good news is that you can potentially refinance the loan with a rental-friendly lender if your current lender doesn’t allow this.

Understand the lending rules when renting out your home to buy another

Lenders will impose certain rules for homeowners converting a primary residence into a rental property. They need to be sure you can handle two homes, especially if you don’t have landlord experience.

First, you should see if you qualify for a new mortgage on top of your existing debt, without the help of rental income. If so, you eliminate the need for extra paperwork that verifies future rent on your home.

But let’s assume you need that income to qualify for the new home.

You need to request Fannie Mae Form 1007, which is a Single-Family Comparable Rent Schedule. It’s like an appraisal, but for rental income instead of home value.

This form is completed by a licensed appraiser and can be ordered by your lender. The document compares your home to similar rental homes in your area. It estimates the monthly rent you could earn.

Besides being a loan requirement, the 1007 can give you a good idea of how much rent you can charge.

But even with this form, you need to prove that you have financial reserves to make the payment on the vacated home, should you be unable to rent it. The amount you need in savings, retirement, and investment accounts depends on the mortgage on the home you’re vacating, and the number of financed properties you have.

You will need, in the bank or investment account:

• 1-4 financed properties: 2% of the unpaid balance of all mortgages
• 5-6 financed properties: 4% of the unpaid balance of all mortgages
• 7-10 financed properties: 6% of the unpaid balance of all mortgages

Keep in mind that you don’t need the above-stated reserve amount for the property you’re buying, nor does the new property count as one of the financed properties.

Most buyers who are renting out their house to buy another will have only one financed property by this definition.

For instance, you are living in a home now that you plan to rent out. You have $200,000 in mortgages on the property.

The lender will require that you have $4,000 in available funds as “reserves.” Plus, your lender will provide Form 1007 to determine the estimated rent.

Again, you can skip all these requirements if you don’t need the rental income on your current home to qualify for the new loan.

Talk to your homeowners insurance company

If you move forward with renting out your home, you’ll likely need to add more coverage to your homeowners insurance policy. That’s because most traditional homeowners insurance policies don’t cover rental-related issues.

Pros and cons of renting out your house

Every financial decision comes with advantages and disadvantages. Here are some things to keep in mind when learning how to rent out your house and buy another. 

Let’s start with the pros: 

• Generate income
• Build equity through renter’s payments
• Increase your assets
• Explore real estate investing

 Now for the drawbacks: 

• Complex tax implications
• Expenses
• Responsibility of a landlord

 You’ll need to weigh these out for yourself to decide which path is right for you.

Tips on how to rent your house and buy another

If you are up for the challenge, renting out your house to buy another can be a lucrative move. Here are some tips to help you get started.

Know your local rental market

Peterson suggests talking with someone who is knowledgeable such as a local realtor if you are considering renting, buying a second property and renting your old one. That person would know if the rental market is strong, how much you could possibly get per month and what it takes to be a landlord. Also, by contacting your accountant before stepping into the landlord world, you can find out information about all the new tax laws that could affect you and what your property taxes might be.

Run the numbers

If you want to profit from your rental, take the time to run the numbers. Consider the range of rates you could earn from the rental. Check to see if that range would cover the expenses related to the property.

What are the advantages of owning investment property?

“Part of the advantages of owning investment property, you get to write off all improvements and all the maintenance. But when you sell it, as the value appreciates, you have to pay capital gains on all the profit. It can be a big expense especially if you bought a house back in the day when prices were appreciating a lot.”

For example, let’s say you bought your current home for $100,000, and now it’s worth $200,000. You decide to rent it for a few years. You get tired of being a landlord and put it on the market for sale.

“That $100,000 that has appreciated in your home becomes taxable money. But if you had sold that house when you were still living in it, that $100,000 is tax-free. That’s a big difference,” he says.

On the other hand, if you bought your house in the upper end of the market for $200,000, and it’s still worth $200,000, there is no capital gain problem. Then, it could be a good idea to keep it for an investment when you buy a second home, Peterson says.

Should you hire a property manager?

Laura Adams, a personal finance expert in California and author of Money Girl’s Smart Moves to Grow Rich, has had a lot of rental properties over the decades. When it got overwhelming, she hired a property manager.

“They got me higher rents than I thought I could get and they did a great job of getting quality tenants,” she says.

But if you want to attempt renting your old house, looking for the right tenants can be quite time-consuming. You need to check references and credit scores, you need to show the home sometimes over and over again, you need to figure out a lease agreement, and then you need to see if you can be happy with these people living in your home. Property management can help with this.

“The majority of people renting their old homes find it to be cash positive. They have somebody paying off that asset. Eventually, that asset will be mortgage-free, and you can sell it or have money for retirement or to buy another house,” she says.

But knowing realistically what you can get from the property in a rental situation should be important information to know before you decide anything, she says.

“If you think you can get $1,000 and it’s really only worth $750 then that won’t work with your plan. Go online if there are rental properties and compare them to yours. That’s a good starting point,” Adams says. “If you can make it a wash or just earn a little cash more than what your mortgage is, that generally could be a good idea.”

Can you afford to be a landlord?

Another important issue is whether or not you can afford two mortgage payments.

“If you do decide on turning your old house into a rental, you have to go into it knowing that a renter could leave you. You could go months without rental income on that property,” she says. “Having a savings or reserves fund earmarked for that rental property is ideal.”

What if some really expensive repair comes up, like the furnace going out?

“If these expenses come up, you don’t have the luxury of waiting to fix it. You’ve got to be prepared with a line of credit or savings for unexpected problems. If someone has no savings, then being a landlord is very risky,” she says.

How to rent out your house and buy another FAQs

Can you rent out your house and get another mortgage to buy a new house?

Yes, renting out your current house and getting another mortgage to buy a new home is possible. However, you’ll need to meet the financial requirements of a mortgage lender to be approved for the new loan.

Can you own a house and rent another?

Yes, it is entirely possible to own one house and rent another. Even if you don’t have experience as a landlord, you can work with a property manager to make a home a profitable investment. Consider talking with a knowledgeable real estate expert to discuss the details of your unique situation.

How much equity do you need to buy a second house?

If you want to use some of the equity in your first home to buy a second house, it is possible. But most lenders will only allow borrowers with good credit to take out up to 85% of the home’s current value. 

For example, let’s say that your home is worth $100,000. In this case, you would only be able to take up to $85,000 in equity out of your home. But if you owed any remaining mortgage balance, that amount would need to be subtracted from the $85,000. So, if you still owe $15,000 on the mortgage, you’ll only be able to borrow up to $70,000.

Can I use my house as collateral to buy another house?

No, only the home being purchased can be used as collateral for a loan. 

However, you can take out a home equity loan to take advantage of the value you’ve built in your first house to fund the down payment for the second. 

Keep in mind that defaulting on a home equity loan would lead to losing the first home.

Can you rent your house if you have a mortgage on it?

If you still have a mortgage on your house, you may or may not be able to rent it out. The decision lies with your mortgage lender. With that, you should read the details of your mortgage agreement or talk to your mortgage lender before renting out your home.

How long do you have to live in your house before you can rent it out?

As a rule of thumb, most lenders will expect you to live in a home with owner-occupied financing for at least 12 months. However, life can change rapidly. With that, you may find yourself with a legitimate reason to rent your home sooner than that. 

But you’ll need to talk to your mortgage lender to determine when you’ll be allowed to transition your home into a rental property.

Can I live in my investment property?

In some cases, you can live in your investment property. For example, let’s say that you have a property with 2 to 4 units. You’ll be able to live in one unit and rent out the others. Additionally, you can live in an investment property without any other tenants. However, you’ll need to consider that the expenses associated with the property will no longer be tax-deductible.

Is being a landlord worth it?

The financial reward of being a landlord can add up quickly. However, you’ll need to run the numbers to determine exactly how much you should expect to make. 

Sometimes, you might decide that the time commitment is too much. That’s okay! Consider hiring a property manager or finding another way to put your money to work for you.

Bottom line: Should you rent your house or just sell it?

Now that you know how to rent out your house and buy another, it is time to decide whether this is the right move for you and your finances. 

In some cases, the financial win will be an obvious choice. But in some cases, you might decide to enjoy the profits from selling your home and skipping the hassle of renting it out. 

If you decide to move on to your next home, consider our favorite mortgage lenders for a streamlined process.

The post How To Rent Out Your House & Buy Another | 2024 first appeared on My Mortgage Insider.

This isn’t as difficult as you might think. Many mortgages designed for primary residences will finance a multifamily home — as long as you live there yourself.

Ready to buy a multi-unit property? Click here to check your eligibility (Sep 16th, 2024)

The multi-unit rental property strategy

With rent prices soaring, now would be a great time to become a real estate investor — if it weren’t for all the upfront cash needed to buy an investment property.

But there is a way around this hurdle: You could buy a multifamily property, move into one of its housing units, and earn passive income by collecting rent on the other units.

By living in one of the units, you’d be meeting the owner-occupancy rule for your mortgage. That means getting a lower mortgage rate compared to a loan for commercial properties.

This strategy won’t finance an entire apartment complex or a mixed-use development. It will, however, work for a 2-, 3-, or 4-unit property. Some lenders call these properties duplexes, triplexes, and fourplexes.

In this article:

• Duplex, triplex, and fourplex properties
• How to finance a 2-4 unit property
• Multi-plex loan limits
• Being a landlord
• Our recommended lenders for home loans

The duplex, triplex, or fourplex property

Owning a duplex, triplex, or fourplex is different from renting out a room in your single-family home.

With multi-family real estate, each housing unit has its own address, its own separate entrance, and its own kitchen, bathroom, bedroom, and utility connections.

Each unit should have the same amenities as standard single-family housing.

Some large single-family homes have been converted into qualifying multi-unit properties, especially in high-density urban areas. This is fine, as long as the property is legally converted and the changes are on file with the county or local jurisdiction.

The financial advantage of buying a multi-family property

Before we get into financing options for this type of property, here’s an example of the economic advantage of a 2-, 3- or 4-unit property.

For this example, let’s say you’re buying a fourplex.

If you charge each tenant $2,000 per month for rent, you’d collect $6,000 per month in rental income ($2,000 per month times the three units you rent out).

Let’s say the fourplex costs $1 million and you put 5% down on an FHA loan. A 30-year loan term at 5.5% interest would require a principal and interest payment of $5,394 — $606 less than your monthly rental income.

That $606 won’t be pure profit. As the property owner, you’ll be paying taxes and insurance on the entire residential building, and you’ll be responsible for maintaining all the housing units. In this scenario, you might not break even every month.

But, remember, you’re living in the fourth unit, and you’re not charging yourself $2,000 in rent. More importantly, you’re not paying another landlord $2,000 a month in rent. As time passes, you’ll be building equity in your own real estate investment.

How to finance a multifamily home as a primary residence

Your first step is to identify the proper financing for your property.

Since you’ll be living in one of the units, you can qualify for a mortgage that’s designed for a primary residence. Owner-occupied home loans have lower mortgage rates than commercial real estate loans.

FHA and VA loans, which finance only primary residences, will also work for a multifamily property, and these loan types offer a big advantage: lower down payments and competitive interest rates.

To decide which kind of loan works best, you’ll need to do some math.

Down payment vs cash flow

A lower down payment means you spend less money upfront, but it’ll also mean higher mortgage payments which can stifle cash flow from month to month.

The state of your local housing market is also a factor. If rents have surged in your market, you might be less worried about cash flow. A lower down payment could mean having a bigger budget for building repairs and maintenance as you attract tenants.

In fact, lenders may require you to keep three to six months worth of mortgage payments in your savings account as cash reserves.

Calculate the entire monthly payment

When calculating your monthly mortgage payment, make sure you’re including:

• Principle and interest payments: This pays down your debt on the property; it’s the biggest part of your monthly payment. Some loan calculators show only this portion of the payment
• Property taxes: Mortgage companies add your local property taxes to your monthly mortgage payment
• Homeowner’s insurance: This annual fee will also be collected gradually as part of your mortgage payment
• Mortgage insurance: Most FHA loans include an 0.85% annual fee that’s broken down into 12 installments to be included in your mortgage payment. Conventional loans will require private mortgage insurance premiums if you put less than 20% down

Combining these expenses makes your payment larger. But keep in mind that your renter or renters do not need to pay your entire mortgage payment for this strategy to make sense.

Even if your monthly payment is $6,000 and you collect $5,200 in rent, your payment is drastically reduced. In addition, your renter is helping you build equity faster than you could on your own.

Ready to buy a multi-unit property? Click here to check your eligibility (Sep 16th, 2024)

Minimum down payment on a duplex, triplex, or fourplex

Don’t have a 20% down payment? FHA loans require only 3.5% down on 2- to 4-unit properties. That would equal $26,250 on a residential property that cost $750,000.

If you are eligible for a VA home loan, you may qualify for a zero-down loan.

If you want to stick with a conventional loan, you’ll probably need a higher down payment amount. Here are multiplex requirements:

• 2-unit: 15% down payment required ($112,500 on a $750,000 residential property)
• 3-unit: 25% down payment required ($187,500 on a $750,000 residential property)
• 4-unit: 25% down payment required ($187,500 on a $750,000 residential property)

You will need private mortgage insurance for a 2-unit purchase with 15% down. But homebuyers can cancel the PMI policy when the loan balance reaches 80% of the home’s value.

The FHA’s low down payment catch

The FHA’s low down payment of 3.5% would require only $26,250 down on a $750,000 property. This is a fraction of the six-figure down payment required for a conventional loan.

But there is a catch: the FHA’s mortgage insurance premiums (FHA MIP) which protect the lender in case of a foreclosure.

The FHA charges 1.75% upfront and another 0.85% annually in MIP. The annual insurance lasts for the entire life of the loan unless you put 10% or more down. In that case, it goes away after 11 years.

For a $750,000 property, upfront FHA MIP would add $12,665 to the loan amount upfront. Annual mortgage insurance would add about $512 a month to each mortgage payment. This annual premium decreases a little each year as the loan balance grows smaller.

Despite these extra charges, an FHA loan may still be your best option, especially if it lowers your interest rate compared to conventional borrowing. Either way, be sure you’ve weighed the costs before deciding.

Check your eligibility for an FHA loan. Start here (Sep 16th, 2024)

Multiplex loan limits 2024

Most primary residence loans have maximum sizes that change from year to year. For example, in 2024, conventional loans can’t surpass $766,550 in most U.S. counties; FHA loans top out at $498,257. The VA doesn’t limit loan sizes.

Loan limits for conventional and FHA loans go higher for multifamily properties. Loan caps depend on the number of units.

FHA loan limits for multifamily real estate

• Duplex: $637,950
• Triplex: $771,125
• Fourplex: $958,350

Conventional loan limits for multifamily real estate

• Duplex: $981,500
• Triplex: $1,186,350
• Fourplex: $1,474,400

Limits go even higher in high-cost housing markets

The loan limits above apply to most counties in the U.S. Areas with more expensive real estate have higher loan limits.

For example, FHA loans in Riverside County, California, allow a loan of up to $766,550 on a single-family home, but up to $1,474,400 on a 4-unit property. In New York County, N.Y., (Manhattan), an FHA loan on a 4-unit property could reach $2,211,600.

Find your county’s loan limits for multi-family or single-family properties here:

• Conventional multi-unit loan limits by county
• FHA multi-unit loan limits by county

While these loan amounts may sound big, remember that your tenants will help you make payments towards the purchase price.

As time goes on, the borrower will have increasing equity in a very high-value asset. A 4-unit home worth $800,000 today could be worth $900,000 or even $1 million not too long from now. That’s quite a retirement plan!

Being a landlord

Isn’t there a downside to owning a row of townhouses or a duplex? Maybe. If you don’t like the prospect of collecting rent each month from your tenants, sharing walls with neighbors,fixing garbage disposals, or replacing a hot water heater at odd hours, being a landlord may not be for you.

When you’re a landlord you’re required to keep the property in good shape for your tenants. You’ll need to be available when things need fixing. If this doesn’t sound like fun to you, property management companies can perform all your landlord duties for a monthly fee.

And, there’s always a risk that you won’t be able to find renters for your spare units. Make sure you have adequate cash reserves to make the mortgage payment on your own in this scenario.

Whether you have enough rental income to pay your entire mortgage payment, or to just help out, living in a multi-unit home could be a great strategy. Owning a 2-, 3-, or 4-unit property could be a fantastic way to get someone else to help you pay for your home.

Ready to buy a multi-unit property? Click here to check your eligibility (Sep 16th, 2024)

Tax implications of a real estate investment

As a landlord, your annual income tax return will be complex. You’ll need to document rental income and also maintenance expenses. It’s possible to write off the mortgage interest on a primary residence loan, which is a nice tax benefit.

A lot of landlords hire an accountant or a tax professional to help keep track of their income and expenses.

In any case, be sure to plan ahead for this new responsibility and check with a tax expert who can help you understand your obligations. Nobody likes to learn the nuances of tax law with the IRS’s filing deadline looming.

Lease agreements protect you and your tenants

Landlords and tenants should agree to terms and then sign lease agreements to make the deal official.

You can find standard lease agreements online, but before signing, you’ll need to understand all your responsibilities and rights as a landlord. Make sure you understand the tenants’ rights, too.

A property management company could help with this if necessary.

How much rent do I charge?

How do you decide how much rent your tenants will owe each month?

The easiest way is to do a quick search on a website that shows rental listings. See what landlords are charging for properties with comparable living space (in square feet) and similar amenities.

Keep in mind that location is a factor with rent prices just like it is with real estate.

If the condominiums down the street charge $2,500 a month for a 2-bedroom, 2-bathroom unit, you might want to use that price as a starting point. However, if those condos include a pool and a fitness center that you can’t offer, maybe you should charge a little less.

Using rental income to qualify for a loan

Speaking of rental income, you may be able to use the proposed rental income from the property you are buying to help you qualify for the mortgage. If you have landlord experience, your chances of using the future rental income are better. However, some loan types allow you to use the income to qualify even if you have no prior landlord experience.

Buying a multifamily property FAQ

What is a multi-unit property?

A property with more than one housing unit is a multi-unit property. These properties can include single buildings with multiple units or properties with multiple buildings. To use a primary residence loan, the property can’t exceed four units, and you’ll need to live in one of them.

What’s the best loan to finance a multi-unit property?

Properties with two, three, or four units can be financed with a conventional loan, FHA loan, or VA loan — but only if the owner plans to live in one of the units. FHA loans have much lower down payment requirements, but they also charge higher mortgage insurance fees. VA loans can finance multi-unit properties with no money down.

What is the minimum down payment for a multi-family property?

You could buy a multi-family home with no down payment if you’re a veteran or active duty military member who’s eligible for a VA loan. FHA loans will require at least 3.5% down. Conventional loan down payments vary from 15% to 25% depending on the number of units in the property.

Is buying a triplex a good investment?

Any kind of residential property can be a good investment, especially in a housing market with rising rents. A triplex includes three housing units. A primary residence mortgage loan could finance a triplex if the borrower agrees to live in one of the units and rents out the other two.

Can I buy a duplex with an FHA loan?

Yes, FHA loans will finance a duplex, but only if the borrower uses one of the two housing units as a primary residence.

Can you use a VA loan to buy a duplex?

Veterans and active duty service members can use VA loans to finance a duplex. Since VA loans work only for primary residences, the veteran would need to move into one of the units and rent out the other unit.

Check multi-unit property rates

Multi-unit properties can be a great investment.

Interest rates on these properties vary by loan type and by borrower. A mortgage pre-approval will show what kind of deal you could get.

Ready to buy a multi-unit property? Click here to check your eligibility (Sep 16th, 2024)

The post Buy & Live In a Duplex, Triplex or Fourplex to Earn Rental Income first appeared on My Mortgage Insider.

Unless you’re sitting on a boodle of cash, buying a second home — whether for an investment property or a vacation home — will require you to make a down payment for a mortgage.

To qualify for a conventional loan on a second home, you’ll likely need to put down at least 10% — though some lenders require down payments of 20% to 25%. The down payment requirements will depend on factors like your loan type, credit score, and debt-to-income ratio.

But there are also ways you can purchase a second home without making a down payment. Here’s what to do.

Check your eligibility to buy a second home. Start here (Sep 16th, 2024)

The difference between a mortgage on a primary residence and a second home

Your primary residence is the place you call home for most of the year. For most conventional loan borrowers, qualifying for a mortgage on a primary residence requires a minimum down payment of 3% of the home’s sales price, a debt-to-income (DTI) ratio below 45%, and a credit score of 620 or higher.

Qualifying for a mortgage for a second home is a whole different story. Why? Because lenders are assuming more risk when they finance a second home mortgage. This makes sense since you’re adding another large, nonessential payment to your household’s expenses.

Typically, to qualify for a conventional mortgage on a second home you must have the following:

• Minimum down payment of 10%
• Credit score of at least 680 (although you might qualify with a 640 credit score if you make a down payment of 25% or more)
• Debt-to-income ratio of up to 43% (though some lenders may allow you to stretch up to 50%, depending on your credit score and the size of your down payment)
• At least two months of cash reserves

How to finance a second home

Generally speaking, there are two ways to finance the purchase of a second home: you can either get another mortgage or tap the existing home equity in your primary residence. You can access your equity with a cash-out refinance, a home equity loan, or a home equity line of credit (HELOC).

Cash-out refinance

A cash-out refinance entails refinancing the current mortgage on your primary home for more than what you currently owe and pocketing the difference in cash. In most cases, you can borrow up to 80% of your home’s value.

You’ll be getting a whole new mortgage, which means it will impact the mortgage interest rate you’re currently paying on your home, and you’ll be resetting the clock back to zero on the loan.

Home equity loan

A home equity loan is a second mortgage, borrowing against the equity you have in your home. You receive a lump sum of money upfront, which you begin paying interest on immediately.

Typically, you can borrow 80% of your home’s appraised value, minus what you already owe. If your house is currently worth $400,000, and you owe $200,000 on your mortgage, that gives you $200,000 in home equity, which means you could borrow up to $160,000 with a home equity loan.

Since a home equity loan is a second mortgage — meaning it’s in addition to the first mortgage you have on your current home — it won’t impact the terms or duration of your existing loan. You’ll make monthly payments on the home equity loan in addition to your existing monthly mortgage payment.

Home equity line of credit (HELOC)

A HELOC allows you to open a line of credit against your house, giving you access to up to 80% or 90% of the property’s appraised value in cash. It’s a rotating line of credit, which means you withdraw money as needed, up to the limit. After a certain period, you’ll begin repaying the loan in installments.

A HELOC offers more flexibility than a cash-out refinance or home equity loan since you can withdraw money whenever you need it, as opposed to taking one lump sum of cash.

One important factor to consider when choosing between a home equity loan or a HELOC is that a home equity loan has a fixed interest rate, whereas a HELOC has a variable interest rate. That means the interest rate you’re paying could vary over the life of the loan, depending on market conditions.

Check your eligibility to buy a second home. Start here (Sep 16th, 2024)

4 ways to fund a down payment on a second home

There are four ways that you can fund a down payment on a second home: savings, a cash-out refinance, a home equity loan, or a HELOC. Each funding option has pros and cons.

1. Savings

Using savings to fund a down payment is perhaps the simplest route to take. Plus, you don’t have to pay interest since you’re not borrowing money for a down payment from a bank.

But dipping into your savings also means that you’re reducing the amount of cash you have on hand to pay for things like emergency expenses and maintenance costs for your second home.

2. Cash-out refinance

A cash-out refinance gives you access to a large chunk of cash at a relatively low-interest rate, but your overall debt load will increase and you’ll be changing the terms of your existing mortgage.

Moreover, cash-out refinances typically have closing costs between 2% and 5% of your loan amount. These cover refinancing costs like lender fees, appraisal, and other expenses.

3. Home equity loan

A home equity loan provides predictable monthly payments since this type of loan comes with a fixed rate. However, closing costs typically run 2% to 5% of the loan amount, and home equity loans usually have higher interest rates than cash-out refinances or HELOCs.

4. HELOC

A HELOC requires you to pay interest only on the amount that you borrow or “draw” from the credit line, which can potentially save you a lot of money in interest. HELOCs also offer the option of interest-only payments.

But HELOC interest rates — while lower than home equity loan rates — are higher than cash-out refinance rates. Additionally, HELOC rates are variable, meaning you could face higher monthly payments in some months as the rate adjusts based on market conditions.

Can you buy a second home with no down payment?

It is technically possible to purchase a second home without putting any money down but the reality is that it’s complicated.

Government-backed zero-down loan programs are intended to help buyers purchase primary residences, which means they can’t be used to buy investment properties or vacation homes. That said, you already own a home and are looking to purchase a second home to move into as your new primary residence, you may be able to qualify for a zero down payment loan, such as a USDA loan (backed by the United States Department of Agriculture) loans or a VA loan (backed by the Department of Veterans Affairs). You’ll likely have to prove that you’re moving for a good reason, such as a job change or a military re-assignment.

Qualifying for a second home mortgage

If you intend to apply for a second home mortgage, you’ll need to meet certain eligibility requirements. These borrower requirements can vary depending on what type of loan you’re applying for. Typically, though, you’ll need at least 10% down and a FICO score of 680 or higher.

In addition, the property that you plan to purchase as a second home has to meet certain requirements. Typically, the new home must be at least 50 miles from your primary residence to be considered a second home. And, from a tax perspective, the IRS defines a second home as a property you live in for more than 14 days per year or 10% of the total days that the property is rented to others.

If you plan to rent out your new property full-time, it’s considered an “investment property” rather than a “second home.” Investment property loans are subject to higher interest rates and stricter requirements than second home loans (for example, you’ll likely need a bigger down payment — likely 20-25%).

Check your eligibility to buy a second home. Start here (Sep 16th, 2024)

Down payment for a second home FAQ

Do you need a down payment for a second home?

Typically yes. In almost all cases, to purchase a second home, you will need to make a down payment and it will be larger than the down payment needed to purchase a primary residence. Under rare circumstances, VA, USDA, and physician loans that don’t require a down payment can be used to purchase a second home. Assumable mortgages can also allow a borrower to purchase a home without a down payment.

How much down payment is needed for a second home?

Typically, you need to make at least a 10% down payment to qualify for a second home mortgage. However, there are certain types of second mortgage loans that allow for a lower down payment.

Can you put 5% down on a second home?

Yes, you can put as little as 5% down on a second home if you obtain a VA, USDA, FHA, or physician’s loan, though these loan programs are generally intended to help borrowers purchase a first home and can only be used for a second home under specific circumstances, such as a new job or military re-assignment.

Do I have to put down 20% on a second home?

No. Most lenders allow borrowers to put as little as 10% down on a second home with a conventional loan.

Can you use a HELOC for a down payment on a vacation home?

Yes, a HELOC is one of the most common ways that homeowners fund a down payment for a second home purchase. To use a HELOC for a second home down payment, you’ll need to have sufficient home equity in a property you already own.

How much equity should you have before buying a second home?

It depends on how you plan to finance your second home. Typically, you can borrow up to 80% of your home’s value with a cash-out refinance; 80% to 85% of your home’s appraised value, minus what you owe, with a home equity loan; or 80% to 90% of your primary residence’s appraised value with a HELOC.

Can I use my home equity to buy a second house?

Yes, tapping your home equity is a popular way to fund the purchase of a second home, but you must have a certain amount of equity to do so.

How can I use equity to buy a second home?

Using equity to purchase a second home allows you to pull out cash from your current home, either in the form of a cash-out refinance, a home equity loan, or a HELOC. Each option lets you borrow a certain amount of equity against your home.

Can I take out a HELOC on a second home?

It is possible to get a HELOC for the purchase of a second home, but, in most cases, you must have a debt-to-income ratio of 43% or below, a credit score of at least 700, and at least 20% equity in your primary home.

What are the risks of using a home equity loan to buy another house?

If you use a home equity loan to buy another house, you’ll be putting both your primary home and the second home at risk of foreclosure if you default on either loan, since you’re putting your primary home up as collateral. Also, because home values can rise and fall, you could become upside-down (or underwater) on your mortgage if your home’s value plummets and you owe more than what it’s worth.

The bottom line: Making a down payment on a second home

There are many financing options and down payment options for purchasing a second home. Whether you’re looking to purchase a rental property to generate rental income or seeking to buy a vacation home for your family, you can find the best loan option for you.

Check your eligibility to buy a second home. Start here (Sep 16th, 2024)

The post How to Make a Down Payment for a Second Home first appeared on My Mortgage Insider.

Here are surefire ways to acquire a foreclosure, short sale, or other distressed property – and do it quickly.

Q: “Can I get a bank loan to buy a distressed property?”

A: That’s a question I hear all the time as a full-time real estate investor. Well, the answer is surprisingly, yes. If you know what you’re doing and move forward wisely, you can easily wind up with a bank funded distressed property on your hands with deep equity in it.

Can You Pay Cash?

At the outset, my advice to you is always to buy with cash if you can. Cash is always easier and you can usually get a discount when you’re bringing cash to the table. But if you’re like most Americans, you might not have several hundred thousand dollars of cash on hand.

Cash is best because it’s quick. If you wait for a bank loan to come through you’ll have to wait 30 to 45 days and might lose the property to another buyer. So if you don’t have immediate access to cash and want the property right away, you need a plan to get the property and get it quickly.

So, What’s a Buyer to Do?

Home investors typically don’t want to be in the deal for more than 70% of the after repair value (ARV).

Here’s a quick definition of ARV.

So…because you won’t be able to get a conventional F.H.A., R.D., or V.A. loan for a distressed property, you’ll need to find another source of funding.

That’s where private lenders come in.

You can borrow money from a private party until the bank loan gets funded up to 45 days later. When the bank comes through, you refinance with the bank at a lower interest rate and pay back the private lender.

A very good strategy would be to get a Master Loan Commitment (MLC) from a bank or credit union. This tells anyone who reads it (i.e. your private money person) that the bank who gave you the MLC will fund your loan. It’s guaranteed.

Look at conventional loans first. It can be time-consuming to secure a rehab loan in combination with most VA, FHA and USDA financing. There is the FHA 203k loan, but that can take 90 days or more to complete.

So conventional is the path of least resistance. Still, you will need a 20 to 30 percent down payment if you choose conventional.

So this strategy will only work if you have some cash on hand.  Let me show you a workable strategy to use cheap bank money to get a deep equity property.

An Example Flip Transaction

You find a home that you know you could make money on if you buy it for $100k or less. The seller is asking $120,000, but that’s too much to pay if you want to turn a profit. You have to buy it at $100,000 or less.

Don’t compromise on this. Seriously, don’t do it. Trust me.

So, assuming you can get it for $100k. (We’ll discuss how to negotiate with the seller before the end of this post.) Here’s what the deal looks like:

Bank Loan: $70k

Your Down Payment: $30k

Buying the Home: $100k

So you need a private money lender to loan you $70,000 so you can grab this house quickly. Now the private money guy is going to be more expensive, and here’s what they’ll want from you:

1. Your Bank Loan Commitment Letter
2. Proof of funds (showing them you have $30,000)
3. On your first deal, they might even want to talk to your banker

Now it’s always better to do this in your business name, so you’re not putting your personal funds or house on the line. If you get the thumbs up from the private money guy and the bank, here’s how the deal needs to go down:

1. You borrow $70,000 from a private lender who charges one to two percent of the loan amount.
2. The lender secures the deal with a Deed of Trust, to be paid in full, principal and points, in 30 days.
3. You bring your $30,000
4. Your total cost to get this house: $101,400 (assuming a charge of two percentage points upfront).

Why pay more for the loan?

You’re trading time for equity. If you can get the house at a
discount, the equity you’re getting offsets the loan fees and points.

So after 30 days or so, you get your bank loan, your private money guy gets paid off, and now you have a house that’s funded by a bank at a cheaper interest rate than the private money lender.

Getting the Price Down

So this is all well and good, but how do you get the seller to come down to $100,000 (in our example deal). To make money here, you need the house for $100,000 but they want to sell it to you for 120,000.

Give them an offer they can’t refuse.

Every buyer wants cash and they want it quickly. And every buyer also wants to pay as little as they can to repair or rehab their house before they sell it. So, you make it easy for them.

A typical purchase contract usually has an escape clause for you the buyer. It’s called an “inspection contingency.” Basically this means that after the inspection if you don’t like what you see, you can bail. No harm no foul. Then the seller has to go back to the market and find someone else to jump through all the hoops in the purchasing process.

For each buyer they do this with, the home inspection process can tie up their house for 2 weeks (not to mention a 45 day close). That’s about 60 days before they see any cash, plus they might have to pay for any repairs (e.g. mold, new roof, earth to wood, etc.) and the buyer can always bail if they don’t want the property for whatever reason.

No seller wants to do that.

Your Sales Pitch

You approach the buyer who wants $120K and say this (roughly):

“Hi Mr. Buyer, My name is Nate and I want to buy your house. Now I know you’re asking $120,000 for it and I want to counter. I’m willing to give you $100,000 cash on Tuesday and I’ll buy your house as is, where is, with no inspection. This way you don’t have to worry about repairing your house, and you’ll have cash in hand next week. You don’t have to tie up your home in the inspection process, pay for any repairs, or wait 60 days before you see any money.”

Now your pitch has to look something like that. You have to sell it. They benefit because they get fast cash and don’t have to fix or repair ANYTHING. You benefit because when you buy at a discount, you’re getting equity in the deal and the money you’re saving will take care of any potential issues or problems you face post-purchase.

It’s a win for everyone involved. You just have to make sure you have your numbers right and can sell the deal.

Where to Find Private Money Lenders

Lastly, if you’re just starting out and have no clue where to find private money lenders, here’s a few ways I do and have found them in the past before I solidified the network of lenders that I work with now:

• Local networks, meetups, clubs, and groups. Google them and join ‘em all (e.g. Google “
  “local R.E.I. Group” and check out The National REIA too).
• Go to your County Courthouse and pull up a private lenders list (yep you can do this).
• Craigslist. I don’t like to hop on Craigslist too much but if you must, there are a ton of people willing to fund deals for you.
• Ask around, stay local, network, and you’ll find these guys. They’re everywhere.

So that’s it for now. If you’re interested in getting a mortgage on a distressed property, now you know how to do it. You just have to network, sell, be diligent, and stick to your numbers and you can make it happen.

Check your home buying eligibility. Start here (Sep 16th, 2024)

The post Buy Distressed Property in Just a Few Days first appeared on My Mortgage Insider.