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Can I get home equity loan on property bought for cash?

Can I get an equity loan on a property I buy for cash to flip and use the loan proceeds for the down payment on a home I want to buy and live in?

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

We usually recommend that you buy the home that you want to live in first before buying a home that you intend to flip, even if you pay cash for the home being flipped. Buying a home for cash and then trying to arrange a loan to take cash out of the property at a later date can hinder or hurt your ability to qualify for a mortgage on the home you want to buy and live in.

This is because when you buy a home with cash, most lenders require that you own the home for six months to a year before you take cash out of the property with a home equity loan, home equity line of credit (HELOC) or cash-out financing. Additionally, please note that a cash-out financing usually requires borrowers to pay a higher interest rate than a standard home purchase mortgage or refinance. This means that you may pay a higher interest rate on the financing to take cash out of the property you want to flip as compared to a mortgage on the home you want to live in. On a positive note, the interest rate on a home equity loan or HELOC for a property you own free and clear should be consistent with standard home equity loans on properties with existing mortgages.

If you satisfy the lender's required waiting period (if applicable) and are able to arrange a loan to take cash out of the free and clear property then most lenders do not restrict the use of proceeds from this type of home loan. So you could use the proceeds from the loan for a down payment on another home to live in or to purchase another home to flip.

It is important to highlight that any home loan you take out against the property that you buy with cash is factored into your application for a mortgage on another property. For example, the monthly loan payment and other housing expenses such as property tax and hazard insurance for the home you buy with cash are considered debt when you apply for another mortgage. To qualify for another mortgage, you must generate sufficient income to afford the monthly loan payments and housing expenses for both the loan you took out on the home you bought with cash and for the mortgage on the home you want to buy and live in. So depending on your monthly gross income and other debt payments, taking out a loan on the home you bought with cash may make it harder to qualify for a mortgage on the home you want to buy and live in. We provide a comprehensive overview of mortgage qualification guidelines including debt-to-income ratio and credit score requirements on FREEandCLEAR.

We recommend that you contact multiple lenders to understand how they would handle your unique situation. You can review lenders in your area by clicking INTEREST RATES We advise you to contact at least four lenders as guidelines on financing a home you bought with cash can vary. Plus, comparing lenders is the best way to save money on your mortgage.

Your final option is to contact lenders that specialize in working with borrowers who flip homes although I am not sure how helpful the loan programs offered by these lenders would be to you. Lenders that finance home flippers usually offer three-to-six month loans that help home flippers buy or renovate properties. So the loans are short term and the proceeds are usually required to go into the property being flipped as opposed to enabling borrowers to take cash out of the property. Most "home flipper" lenders also require that borrowers have a successful track record of profitably flipping homes before the lender is willing to loan them money.

Despite their limitations and requirements, a home flipping lender may enable you to free up some of the money that you were going to use to buy the home that you want to flip. For example, instead of spending $100,000 of your own money to buy the home you want to flip, you could get a $40,000 loan from a home flipper lender which means you are only using $60,000 of your own money. In this scenario, you can use your remaining $40,000 for a down payment on the home you want to live in or for other purposes.

While I think your best option is to buy the home you want to live in before you buy a home to flip, working with a home flipper lender is a financing option worth considering.

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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