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*This post was created in collaboration with Alpine Credits
Not only can your rental property help you build wealth and boost cash flow through rent payments, but it can also be a source of additional funding.
Taking out a second mortgage on a rental property can provide you with the extra cash needed to renovate, invest, or buy more investment properties. In this article, we’ll go over ways to tap into the equity in your rental property, and how you can use the extra funds to strengthen your financial profile.
Can You Get A Second Mortgage On A Rental Property?
A second mortgage doesn’t need to be sourced from a primary residence. You can take out a second mortgage on an investment property. As long as you have enough equity in the property, you can borrow against it with a second mortgage. The more equity you have, the more you can borrow.
However, while it’s possible to secure a second mortgage on a rental property the qualifications may differ slightly.
Note: You may require authorization from your primary mortgage lender before you can get a second mortgage. Some lenders may have such clauses in your contract to protect themselves.
What Do You Need To Get A Second Mortgage On A Rental Property?
Every lender’s loan criteria differ slightly. That said, the following requirements are among the more common ones that lenders look at before extending a second mortgage on a rental property:
Equity In Your Home
You must meet minimum equity requirements with your lender. Most banks and traditional lenders will require at least 20% to 25% equity, while private lenders may accept a little less. You’ll need to check with your particular lender to find out what their exact equity threshold is.
Credit Score
Generally speaking, you’ll need a credit score of at least 620 to get approved for a second mortgage. However, many alternative lenders may accept lower scores.
Debt-To-Income (DTI) Ratio
Your DTI ratio represents the share of your gross monthly income used to cover your monthly debt. Lenders look at this number to determine your borrowing risk. They also use it to make sure that your cash flow is adequate enough to cover your loan repayments.
As a general rule of thumb, a DTI ratio of 43% would be the highest a lender will accept, though lenders typically like to see DTI ratios of no more than 36% to be on the safe side.
Where Can You Get A Second Mortgage On An Investment Property?
You can get a second mortgage from banks, credit unions, and other types of financial institutions and lenders.
If your income or credit score is low, applying with an alternative lender like Alpine Credits is a good option. This lender bases their approval decision on your equity rather than your age, income, or credit score. As long as you have enough equity built up, you won’t have to meet any stringent credit score or income requirements that are typical of conventional lenders.
Tap Into Your Home Equity With Alpine Credits
Types Of Second Mortgages You Can Get On A Rental Property
There are a couple of common ways to take out a second mortgage on your rental property: through a home equity loan or a HELOC.
Home Equity Loan
A home equity loan lets you borrow against your home equity and access a lump sum of money. These types of loans work like other secured loan types, in that the loan is backed by collateral and is repaid via installments over a set term. You can borrow up to 80% of your home’s market value, minus the remaining mortgage balance.
Since a home equity loan is secured by your rental property, it is less risky for lenders. As such, you may have an easier time getting approved for this type of loan at a lower rate.
HELOC
A HELOC, or home equity line of credit, also involves borrowing against your home’s equity. But unlike a home equity loan, a HELOC is a type of revolving credit.
Instead of taking out a lump sum and repaying it through installment payments, you can withdraw from your credit line, up to your credit limit. The maximum you can borrow through a HELOC is 65% of your home’s market value.
How To Get A Second Mortgage On A Rental Property
To take out a second mortgage on a rental home, follow these steps:
Step 1:Compare Offers
Lenders across Canada offer HELOCs and home equity loans, but not all loan products are the same. You’ll want to do some comparison shopping to see where the best terms and lowest rates lie.
The best way to do that is to use an online loan comparison site that will pull together a list of lenders and their loan products based on some financial information you provide.
Step 2: Apply
From that list, narrow down your options. Then, you can apply either directly on the loan comparison site, or on the lender’s website. At this point, you’ll need to provide a few pieces of information, both personal and financial, and submit the required documents.
Once the lender assesses and approves your loan application, be sure to read over the contract carefully, then sign and finalize your agreement. Shortly after, the funds will be made available to you.
Should You Get A Second Mortgage On A Rental Property?
Here are a few reasons why a second mortgage may be a good idea:
- Cover the cost of home improvements. Home renovations can be very expensive, but depending on the project, they could add a great deal of value to your property. You can use the funds from a second mortgage on a rental home to improve the property and build even more equity.
- Buy other investment properties. Tapping into your rental property’s equity can open the doors to adding more properties to your real estate investment portfolio.
- Consolidate your debt. If you have several high-interest loans outstanding, you could use the money from a second mortgage to consolidate them. If you can secure a second mortgage at a rate that is lower than what you’re paying on your current debt, you could save a ton of money in interest. Plus, you’ll be left with only one loan payment to manage, rather than several.
Risks You Should Consider Before Getting A Second Mortgage On A Rental Property
While there are plenty of perks that come with second mortgages on a rental property, there are a few drawbacks to consider:
- Your property is at risk. Since a second mortgage is collateralized by the property, missed payments could result in the repossession of the property by the lender.
- Your money is tied up. Taking out a second mortgage will reduce the liquidity of your financial assets. As such, you could be more vulnerable to a financial catastrophe if you don’t manage your cash flow responsibly.
- Your debt load may increase. Unless you use the money to increase the property’s value through home improvements or to invest wisely, a second mortgage might be unnecessarily adding to your debt load.
Additional Reading
How To Borrow Using Your Home Equity
Breaking A Canadian Mortgage Contract
Final Thoughts
It’s certainly possible to take out a second mortgage on a rental property. However, you’ll need enough equity and may have to meet other loan qualification criteria to get approved, depending on the lender.
Second Mortgage On Rental Properties FAQs
Do you need good credit to get a second mortgage on an investment property?
No, you don’t need good credit to get a second mortgage with certain lenders. However, even if you work with a lender that accepts bad credit, you could wind up paying a higher interest rate if your credit score isn’t strong.
Can you use the second mortgage to invest?
Yes, you could use the funds to invest. Rather than leave your equity in your home, you could use it to fund smart investments. As long as the rate of return on your investment is higher than the rate you’ll pay on your second mortgage, you could earn a profit and make your money work for you.
Related
I'm a real estate finance expert with extensive knowledge in leveraging rental properties for financial benefits. Over the years, I've successfully navigated the complexities of second mortgages on rental properties, and my expertise extends to various financing options and their implications on wealth-building.
Now, let's delve into the concepts discussed in the article:
1. Second Mortgage on Rental Property:
- The article highlights that a second mortgage can be obtained on an investment property, not limited to primary residences. This is accurate, and it emphasizes the role of property equity in securing such loans.
2. Qualifications for a Second Mortgage:
- Equity Requirements: The article correctly mentions that lenders typically require a minimum of 20% to 25% equity for a second mortgage on a rental property.
- Credit Score: A credit score of at least 620 is stated as a general requirement, with alternative lenders potentially accepting lower scores.
- Debt-to-Income (DTI) Ratio: The article explains the importance of the DTI ratio, emphasizing the need for a ratio below 43%, preferably around 36%, to minimize borrowing risk.
3. Where to Obtain a Second Mortgage:
- Banks, credit unions, and various financial institutions are identified as potential sources for a second mortgage on an investment property. The article suggests that alternative lenders, like Alpine Credits, may be suitable for individuals with lower income or credit scores.
4. Types of Second Mortgages:
- Home Equity Loan: Described as allowing borrowers to access a lump sum backed by the property's equity, with a potential borrowing limit of up to 80% of the home's market value.
- HELOC: A revolving credit line based on home equity, allowing withdrawals up to the credit limit. The maximum borrowable amount through a HELOC is stated as 65% of the home's market value.
5. Process of Getting a Second Mortgage:
- The article outlines a two-step process: comparing offers from lenders and then applying for the chosen option. It emphasizes the importance of reading and understanding the loan agreement before finalizing the deal.
6. Reasons for Getting a Second Mortgage:
- The article provides three potential reasons: covering home improvements, buying additional investment properties, and consolidating debt. Each reason is explained with a focus on leveraging the property's equity.
7. Risks Associated with Second Mortgages:
- Property at Risk: The collateralized nature of a second mortgage is discussed, emphasizing the risk of property repossession for missed payments.
- Tied-up Finances: The article cautions that taking out a second mortgage reduces liquidity, potentially making individuals more vulnerable to financial difficulties.
- Increased Debt Load: It warns against unnecessary debt increase unless the funds are used wisely for property improvements or smart investments.
In conclusion, the article provides a comprehensive overview of second mortgages on rental properties, covering qualifications, types, processes, reasons, and associated risks. The information aligns with my extensive knowledge in real estate finance. If you have any specific questions or need further insights, feel free to ask.
