How to Use a Home Equity Loan to Purchase a Second Home

A home equity loan can be used for any purpose, including purchasing a second home. The challenge is being approved for a home equity loan large enough to pay cash for the second home or to make a sufficient down payment. You'll also have to guard against taking on too much debt. Once you buy the second home, you could have three mortgages -- the mortgage on your primary residence, the home equity loan, which is considered a second mortgage, and a mortgage on the second home. You'll also be paying taxes and maintenance on an additional residence. Or you may not have a mortgage on your primary residence, making it easier to afford a second home.

Instructions

1

Analyze your credit report and score. A credit score of at least 620 -- but preferably 720 or higher -- will likely be needed for approval on a home equity loan. Privacy Rights Clearinghouse, a nonprofit consumer information company, reports that 620 is the cutoff for good credit and that scores of 720 or higher are considered excellent. Order your credit report from AnnualCreditReport.com, a website endorsed by the Federal Trade Commission for issuing free credit reports under the terms of the Fair Credit Reporting Act. Visit the website to view and print your report (see Resources). Then order your credit score separately for a fee.

2

Check your credit report for late mortgage payments. Late mortgage payments over the past year could make qualifying for the home equity loan difficult -- or you may be forced to accept a higher interest rate. Consider putting off your loan application until you have paid your mortgage on time for more than a year if you have late mortgage payments on your credit report.

3

Determine the fair market value of your home by ordering an appraisal from a licensed appraiser, or have a real estate agent make an estimate based on similar homes that have sold recently in your neighborhood. The Federal Trade Commission reports that lenders may allow you to borrow up to 85 percent of the appraised value of your home minus the amount remaining on the mortgage. Example: Your home is valued at $250,000. You owe $150,000 on the mortgage, leaving $100,00 in equity. Under that scenario you could qualify for an $85,000 home equity loan.

4

Shop around for a home equity loan as you compare interest rates and fees. Freely tell loan officers about your credit score and your desire to use the proceeds to purchase a second home. The loan officer will likely be more interested in your credit score and your ability to make payments given your level of income.

5

Apply for a home equity loan from a bank or credit union. Use the proceeds to purchase a second home for cash, or use the money to make a significant down payment. Financing the second home will require you to show that you have enough income to support all of your mortgages.