Do I need 30% equity to qualify for financing?

Question

I just got off the phone with a lender who said I won't be able to get (traditional) financing anywhere unless I sell my house.

I have one rental property with about 10% equity. I'm currently living in a property with about 5% equity. I want to buy another property and move in to it. The lender said they couldn't count rental income unless I had 30% equity in each property, and that that's pretty standard from all lenders.

Is this true? How do I keep both properties and get the third? -- I'm not getting up to 30% on either property any time soon.

Thanks!

Edward B. · Answer

I have never heard that but then again it has been a long time since I qualified for a conventional loan. I remember when they just took 75% of your rental income and applied that to the mortgage in order to determine the hit or help it applied to your debt to income. Then they switched to requiring 2 years of tax returns. That was better because it showed what you were actually clearing on the properties but assumed that the underwriter knew how to back out depreciation, which in my experience not all did.

Banks often have arbitrary standards and apply them as a one size fits all, and it rarely fits the average real estate investor. I would say shop around, maybe find a good mortgage broker. However, most banks will be looking to sell your loan in the secondary market or at least have that option, so if this is a new standard you may be stuck.

There are always other ways to finance deals. I would look into that before I poured money into properties that are cashflowing just fine. Personally I don't believe in locking your money up in a property; there are much better returns to be had elsewhere.

Jeremy Pace · Answer

Rick Pozos

I agree, this may be a case of needing to create your own equity.  It may take you a minute, but it will get you closer to what you want.

Rick Pozos · Answer

If you have to go to traditional financing, then I would pour almost all rental and personal income into paying down the properties to get them to 30% equity.  In the mean time, try wholesaling a house or two for some extra "paydown" money.

Perhaps you could find a private lender at one of the investor meetings.

What about partnering with someone who has money to put in, but does not want to have such an active role??

Brie Schmidt · Answer

@Richard McNeal

I am assuming your first one was a FHA owner occupied and the second is a conventional owner occupied. Then yes, you will need to have substantial equity in the property you currently own to use the rental income.

Do I need 30% equity to qualify for financing?

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