Lack of equity in your house doesn't mean you're out of options when it comes to a home equity loan. If you have an investment property that has equity, you can apply for a loan using that house as collateral. Investment properties are riskier to banks, so you may have to shop around before you find the right one. Once you do, however, you'll see that the process is not much different from a obtaining a home equity loan on your primary residence.
Contact lenders in your area to determine which ones offer home equity loans on investment properties. When you narrow the list down to willing lenders, compare rates, terms and fees to find the best fit for your situation.
Complete the lender's home equity loan application. Indicate the amount and length of loan you are looking for. In the "collateral" section, write down the property address and estimated value and indicate that the property is a rental.
Submit your financial information along with the application. Requirements vary by lender, but typical equity loans require two years of W-2 forms and your most recent pay stub. If you are self-employed, provide federal tax returns in lieu of W-2s. Make sure the returns include Schedule E for your rental real estate. Provide a copy of your current lease agreement and, if you have multiple rentals, a current rent roll.
Sign a disclosure to authorize the lender to run your credit report. Your credit report in conjunction with your income should provide a debt-to-income ratio of no more than 40 percent. Note that due to the riskier nature of rental properties as collateral, this ratio may be lower depending on your lender.
Make arrangements for the appraiser to inspect the property. Inform your tenants of the date and time that the appraiser will be there. Many banks use exterior, or ride-by, appraisals on equity loans. Even so, let your tenants know so they're not suspicious of the person taking pictures of the property. Note that lenders will only lend 70 to 75 percent of the value of a rental property as opposed to 80 percent on a primary residence.
Sign your commitment letter once approved. Contact the lender to schedule a closing date.
Attend closing and sign the loan documents. Your tenant does not need to be involved, as only the owner executes the home equity loan documents.
Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.