Investment Property Second Mortgage Requirements: What Lenders Check

A lender underwriting a second mortgage on an investment property checks six things: that the property is not your home, that the money has a business use, how much total debt the property would carry, your credit, the size of the loan, and what the first mortgage says.

1. The property is not owner-occupied

This is a business-purpose loan on a non-owner-occupied property. Under Regulation Z's official interpretation, credit to acquire, improve, or maintain a rental property that is not owner-occupied is "deemed to be for business purposes". Other uses of the cash have to stand on their own business purpose. There is a limit. If the owner expects to occupy the property for more than 14 days during the coming year, the property cannot be treated as non-owner-occupied (12 CFR 1026.3, comment 3(a)-4).

Primary residences and second homes are outside this product. Lenders verify occupancy, so a property you plan to move into does not qualify.

On our program the property is a 1 to 4 unit residential investment property worth at least $100,000. Short-term rentals (Airbnb, VRBO) are eligible, and that rental income counts. The borrower can be an individual or an entity, such as an LLC. There is no seasoning requirement.

2. The money has a business use

Our program is business purpose only. The regulation explains why. The rental exemption covers credit to acquire, improve or maintain a rental property. Cash spent on a car or tuition is not automatically business purpose.

Uses that fit include improvements to the rental and paying off debt on the investment. We ask what the money is for. We offer both a lump-sum second and a line of credit (HELOC). The second mortgage vs HELOC guide compares them.

3. How much total debt can the property carry (CLTV)?

Lenders cap combined loan-to-value, which counts every lien: the first mortgage and the new second. The formula is value x maximum CLTV, minus your first-lien balance. The second mortgage calculator does it for you.

Take a $400,000 rental at an 80% cap. $400,000 x 80% = $320,000 of total debt. Subtract a $180,000 first and the second can be up to $140,000. Subtract a $290,000 first instead and only $30,000 is left ($320,000 - $290,000), below a $50,000 minimum loan. See CLTV explained for investment property for the full math.

The value in that formula can come from an automated valuation (AVM). A full appraisal may still be required, depending on the findings and the LTV.

4. What credit score do you need?

Lenders set a minimum credit score and may tie the CLTV cap to it. Typical USA Mortgage terms, subject to underwriting, start at a 660 minimum FICO.

5. How big does the loan need to be?

Lenders set a minimum loan size. Typical USA Mortgage terms, subject to underwriting, run from $50,000 to $1,000,000. If the CLTV math leaves less than the minimum, the deal does not fit, however good the property is.

6. How you qualify, and what the first mortgage says

Three methods are on the market. DSCR qualifies on the property's rent against its payment. Alt-doc uses bank statements, a P&L or 1099s. Full-doc uses tax returns and pay records. Our program qualifies on DSCR, with a minimum of 1.00. At 1.00, the property's rent covers its payment. Short-term rental income counts toward it. Ask any other lender which method it uses and what it needs.

Then the first mortgage. Lenders look at its balance, and the first lender's documents may restrict a second lien at all. If you own the rental free and clear, there is no first mortgage to check, and we can take the first lien. There is no limit on how many second mortgages one borrower can have with us.

Some files may be placed with partner lenders.

The first lender's restrictions are their own topic: putting a second lien behind a DSCR or conventional first.

What lenders commonly ask for

• Property — address, type, current value, current lease or rent roll.
• First mortgage — latest statement showing the balance, rate and lender.
• Borrower — ID and credit authorization.
• Purpose — what the money is for, in your own words.
• Reserves and income — whatever your qualification method needs.

Our list is set in underwriting. Typical terms, subject to underwriting: $50,000 to $1,000,000, a fixed rate from 6.99%, prepayment penalty: 0 to 5 years, 660 minimum FICO, up to 80% CLTV on investment properties, minimum 1.00 DSCR, 3-4 week close. Every loan is conditional on the borrower and the property. Business purpose only. Not a commitment to lend.