Home Equity Line for Income Property

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Home Equity Line for Income Property
Posted by: Erik Apr 12 2004, 07:30 PM
My wife and I are considering the purchase of a Duplex with a potential Gross Annual Income of $23,640. We currently have an equity line of $26,500 that we purchased a car with, and a will pay off in 5 years. It is currently at a fixed rate. We would like to up this line to $60,000 and take the available $30,000 or so, and put it into the duplex.

Our concern is that we will not even qualify for a loan for the duplex if we have our 1st Mortgage on our house ($~240,000), $60,000 Line of Equity, and other debts + this new mortgage?! Is this possible? Going with straight numbers, debt to income etc… I am not sure if we would qualify.

My feeling however, is it may be a different process or set of considerations when you are applying for an income property? Of course the idea is that the rent will pay the mortgage and misc. expenses, so how does this factor into the equation when trying to get a loan for this purchase?

Any thoughts would be helpful. If you need any more details to formulate an answer, please let me know.
Posted by: loanuniverse Apr 12 2004, 08:22 PM

You said: My feeling however, is it may be a different process or set of considerations when you are applying for an income property

You are right. A lender should structure the loan for the investment property {the duplex} with the rental income as the source of repayment. The loan should not use your personal income as the source.

A good way to look at it is as two different transactions. The first one will be a home equity loan, which will be repaid with your income as a Butcher, Baker, Candlestick Maker or whatever it is that you do for a living. This is a residential/consumer loan.

The loan for the rental property is calculated using the propertyís NOI or Net Operating Income. Your post does not provide enough information to calculate it, but you can take a look at the following page Sensitivity Analysis for income property There you will find a link to an spreadsheet that is used to calculate the viability of income producing property from the point of view of repayment. The loan for the duplex is a commercial loan.

A couple of thoughts:

1+ Consider buying the property under a corporate entity, possibly one with pass through characteristics. There are some benefits to holding rental property under this scenario. Of course, consult an accountant for that.

2+ Commercial lenders usually require a 20% down payment and sometimes 25%. I donít think you mentioned a purchase price.

3+ It would help if the property was rented already with seasoned tenants.

Good luck and hope this helps.

P.S: there is a lot of info on this site and others about rental property financing, look around some.
Author: Commercial Loan Underwriter