Can you get a home equity loan on a property you bought for cash and use the proceeds for the down payment on a home you want to live in?

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

Edited by Michael Jensen, Mortgage and Finance Guru

Updated October 20, 2020

It is definitely possible to take out a home equity loan on a property you bought for cash but there are multiple points to consider.

First, most lenders require that you own a home for six months before you take cash out of the property with a home equity loan, HELOC or cash-out refinance. So depending on when you bought the property, you may be required to wait before you can qualify for a home equity loan.

The good news is that if you satisfy the applicable waiting period and get approved for the loan, lenders typically do not restrict how you use the proceeds. So you should be able to use the funds from the home equity loan for the down payment on another you want to buy and live in.

The table below shows home equity loan rates, fees and program information. We recommend that you shop multiple lenders to find the loan that best meets your needs. When you contact lenders be sure to explain that you bought the property for cash as you may be able to negotiate better loan terms.

We should note that while lenders do not usually limit how you spend the proceeds from a home equity loan, they do ask how you intend to use the money. If you indicate that you plan to purchase and live in another property, that has implications for the home equity loan.

The qualification requirements and pricing for a home equity loan on your primary residence are different than for a loan on a second home or rental property. If the lender learns that you are buying a new primary residence that may change the terms for the home equity loan.

The interest rate for a home equity loan on a second home or investment property is higher and you are usually required to have more equity to qualify for the loan. Plus, some lenders only offer home equity loans for your primary residence.

While the equity requirement is not as relevant because you own the property outright, paying a higher interest rate increases your monthly loan payment.

On the other hand, you may receive more favorable loan terms because there is no mortgage on the property, which reduces the risk for the lender. In an ideal scenario, the less risk, the better your loan terms should be.

It is important to highlight that any home equity loan you take out is factored into your application for a mortgage on another property. For example, the monthly loan payment, property tax and homeowners insurance are considered debt when you apply for the mortgage on the home you want to buy.

To qualify for the mortgage, you must generate sufficient income to afford the total monthly housing expenses for both the property you own outright and the home you are going to live in. So depending on your monthly gross income and other personal debt expenses for credit cards, car, personal and student loans, taking out a home equity loan may make it more difficult to qualify for the mortgage on your primary residence.

Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan amount you can afford

You may be able to offset some of the costs of the property you bought for cash by renting it out but lenders usually only give you credit for 75% of rental property income unless you have a two year history of income according to your tax returns. This is important to keep in mind when you apply for the mortgage on the new home.

The table below shows mortgage rates and closing costs for leading lenders in your area. We recommend that you contact multiple lenders to determine the loan you qualify for. Shopping lenders is also the best way to save money on your mortgage.

In closing, you can certainly use the proceeds from a home equity loan on a property that you own outright to pay for the down payment on another home. It is important that you work with both the home equity loan and mortgage lenders to make sure that you can qualify for both loans and obtain the best terms.

Sources

"B3-6-05, Loans Secured by Financial Assets."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, February 5 2020.  Web.