Going From 0 -> 1: Creative Financing for Second Property

4 Replies

Hi folks,

Hoping to get feedback from agents, investors and mortgage pros on strategy to acquire a second property in the next 18-24 months, while converting current property (primary residence) into my first rental.

Current situation: I purchased my first property, a 1 bed/1.5 bath new construction condo in Park View, in July 2019 with 3% down. The general plan is to convert this into a rental once the one year lockup period expires, and purchase another primary residence with another low down payment mortgage.

Assume I'll have $25K cash and $45K equity (88% LTV) when I'm ready to buy another property. A few questions I'm hoping to clear up to see if my plan is DOA or not:

-Can I use a combination of cash and home equity (HELOC) to fund a down payment, even on a 3-5% down product?
-Is it even possible to use a HELOC when LTV is >80%?
-Will I be able to use expected rental income from Property 1 to offset the current mortgage payments in my DTI ratio? Basically, I want to know if lenders are able to factor in future rents against the known mortgage liability. If they don't, then I'm pretty screwed.
-Is there a property value limit on most low down payment products, like HomeReady?
-What are some costs or contingencies I may not be aware of, like cost to open a HELOC (appraisal, refinancing, closing), requirements/licenses to rent property in DC, etc?

Thanks and look forward to your responses!

Bumping this... I realize my original post may be too dense. The basic question I'm looking for help with is:

Will lenders accept cash + home equity as a down payment on a primary residence?

If yes, what are the general requirements for getting this type of financing? LTV & DTI minimums, etc.

I'm trying to turn my current primary residence (Columbia Heights/Park View neighborhood) into a rental after purchasing a second property. I'm thinking my timeline could be significantly accelerated if I'm able to use home equity as part of a down payment.

1. Yes, but you might run into a DTI issue.

2. Sure, there are 90% HELOCs out there, but the terms are worse. (Speaking of which, you might also look into an HEL instead of a HELOC, as the underwriting tends to be easier. A "shared appreciation" product could complement a HEL/HELOC.)

3. Generally yes, but you'll be best off if you have a lease in hand for the current place. Otherwise, an appraiser might get called in, which adds more uncertainty. Definitely yes, if you refinance it as investment property -- which many local lenders do, even credit unions like PenFed and Navy Federal. Speaking of which, you might want to ask these questions of a banker :)

4. Yes, but they have exceptions for high-cost areas like this region.

5. Rentals in DC require a business license. Many banks will cover HELOC closing costs.

Hey Peyton -- thanks so much for the detailed reply!

Between now and when my original post, I had a great conversation with my lender, who told me I could use funds from a HELOC towards a down payment. He said there are even 100% LTV HELOCs out there, although yes, I imagine the terms are worse. Since it's essentially free to open a HELOC, I figure I will do it at some point in the next year to have as a piggy bank if needed.

He also said lenders typically add 75% of rental income to DTI, as long as a signed lease is in place, which is great news.

The business license requirement is a great point I didn't know about.

A couple follow-up questions: what's the benefit to refinancing as an investment property? What are the general requirements? How would a shared appreciation product help with available cash for a down payment?

Thank you!

Oops, forgot to actually post this:

Yes, 75% of rental income is typical. Again, you can either go with their appraisal (likely lowball) or bring a lease in hand (could be tough to sell a renter on).

"Shared appreciation" is a new concept offered by a couple of companies, where you sell a fraction of your equity to an investor. It's not dissimilar to a HELOC, but it's equity, rather than debt. Point is one company that underwrites in DC.