When I didn’t have cash for a down payment, a mortgage broker gave me advice that let buy a new home — plus keep the old one as a rental

  • My family had outgrown our 900-square-foot house, but we knew it would make a great rental. 
  • However, we didn’t have the cash on hand for a down payment on a bigger home. During a preliminary call with a mortgage broker recommended by my realtor, I got some good advice: What about a home equity loan?
  • I took out a $35,000 home equity loan to use as a down payment, which allowed me to move into a bigger home, while keeping my first home as a rental
  • Read more personal finance coverage.

Most people who can afford home ownership follow the same cycle: You buy a starter home to get into the market. When that no longer meets your needs, you sell it and use your profit to upgrade to a home that is bigger or better. And so on. 

Because home prices traditionally rise over time, many people follow this path, selling one home to upgrade to the next. Although equity in a home isn’t guaranteed, it’s a likely bet. 

When my husband and I decided that our family had outgrown our first home, we wanted to avoid this pattern. We knew we needed more space: 900 square feet just wasn’t cutting it with two kids and long New Hampshire winters. 

However, we also wanted to keep our home, because we believed it would make a great rental and be a good source of passive income. Since we didn’t have enough cash saved for a down payment on a new home, but didn’t want to sell our home in order to utilize our equity, we felt stuck. 

A little good advice

Over time, I started getting more exasperated with our small living space. I couldn’t work without listening to my kids in the background, and my husband and I had to whisper at night to keep from waking them. Plus, our daughter was approaching kindergarten and we wanted her in a better school district. 

I decided that it was time to move, whether or not we were able to keep our first house. 

To get the process started, I spoke with a mortgage broker. A real estate agent I was talking to said this broker was good at working with people who are self-employed, like me. He was able to find creative solutions to the barriers to getting a mortgage, she said. 

I arranged a preliminary phone call to discuss getting a mortgage. When I explained our financial situation, our jobs, and our goals, the broker asked, “Have you thought about a home equity loan?”

I immediately felt silly for not having considered this. A home equity loan would allow us to borrow against the increased value of our house without selling, he explained. We could access the cash we needed, and still keep our property. It seemed like the ideal solution, but there was still a barrier in the way. 

Qualifying for a loan

When my husband and I bought our first home, the mortgage was only in his name. Although I was working at the time, my business wasn’t established enough to be considered reliable income by the underwriters. 

By the time we were ready to buy our second home, I was the primary breadwinner, working while my husband stayed home with the kids. That meant the second time, the mortgage would be in my name alone. 

I worried that this detail would complicate the process of getting a home equity loan. The loan would have to be in just my name, since my husband wasn’t working. 

However, when I called my credit union I was happy to find out that there was a simple fix. The mortgage to the house was only in my husband’s name, but the deed was in mine as well. Since I was on the deed, my husband just needed to sign off on the loan, saying that it was OK for me to withdraw money from the property that we shared ownership of. 

Deciding how much to take out

My husband and I estimated that we had just under $70,000 in equity in our home. We could take out up to 80% of the home’s value, but we didn’t want to withdraw more than we needed. 

We knew that we would need about $20,000 to cover our down payment and closing costs on a new property, and we also wanted some wiggle room in case we had improvements to make. 

We decided to take out a $35,000 home equity loan, which had a monthly payment of $270 a month over 20 years. 

We used about $10,000 to pay off part of our student loans in order to make our debt-to-income ratio more appealing to underwriters (the broker helped us navigate this). 

That left us with $25,000 to cover the purchase and repair of our new home. And, even with the added $270 monthly expense on our first home, we were still able to rent at a profit of about $500 each month. 

The takeaway

Sometimes it’s easy to fall into the prescriptive patterns around finances, like assuming that you have to sell a home in order to buy another. The experience of using a home equity loan in order to maintain ownership of my home showed me that with a little creativity and good advice, there are alternative options that might be more in line with my personal goals. 

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