Many Americans want to get a home equity line of credit or HELOC on their primary residence. But what about a HELOC on a rental property? It’s possible to get a second mortgage or equity line of credit on a 2nd home or rental property, but the HELOC loan requirements are more challenging than for your personal residence. Having the ability to take out a HELOC on an investment home or rental property is huge asset to acquire wealth with real estate.
Can I Get a HELOC Line of Credit on a Investment Home or Rental Property ?
Learn about HELOCs on investment properties below, then speak to one of our lending experts to see if you qualify.
Many people get HELOCs on their primary residence, which is relatively easy to do because it is where you live.
Using a home equity loan or HELOC on an investment property allows investors to access the equity that has accumulated over time.
This otherwise idle equity can be leveraged as an alternative funding source for various purposes: upgrading your home, improving your credit, consolidating debt, or even purchasing a new property.
At the very least, understanding how to effectively use a HELOC on an investment property is essential for anyone looking to gain a competitive advantage in the market.
However, getting HELOC on a rental property is more difficult and comes with more strings.
Home Equity Line of Credit Overview
A home equity line of credit or HELOC is a second mortgage that is secured by your property.
The HELOC is a line of credit that works like a credit card.
Your home equity loan lender sets a certain credit limit based on the equity in the property.
You can borrow up to your maximum credit card and pay it back over time, with interest. A 10-year draw period is fairly standard on HELOCs and you can use and re-use the credit line during this period as you pay it back. Compare the benefits and risks of the home equity loan vs line of credit.
HELOCs on Rental Properties
Taking out a home equity line of credit on investment or rental properties usually has more restrictions because of the higher lender risk. For example, some HELOC lenders may limit how funds taken from a rental property are used:
• Making improvements with HELOCs on investment properties to get a higher rent each month.
• Write checks on HELOC account for major repairs on the property, such as HVAC replacement or putting in a new roof.
• Enhancing the property value by putting in a finished basement or attic for additional rental income.
• Paying off the mortgage on another investment property.
• Using the HELOC pays for the down payment on a new rental property.
Compare HELOC Rates from Top Lenders
See Today’s HELOC Loan RatesOther lenders may not have any restrictions on how you use the HELOC funds. Lenders don’t want to see that you use HELOC funds to pay mortgages on other properties. This suggests you have financial problems, so approval is unlikely.
Most home equity lenders allow you to use investment property HELOCs. This means the purpose of the HELOC-funds is to meet the down-payment requirements of the investment property or second home.
BD Nationwide can help you find lenders that offer a HELOC on an investment property or second home.
Requirements for a HELOC on an Investment Property
- A credit score of 720 or higher
- A maximum loan-to-value (LTV) ratio of 80%
- Savings covering at least six months of operating expenses for the rental property
- Verification of long-term tenants
- A debt to income ratio (DTI) between 40% and 50%
- A minimum of 20% equity in your investment property
Key Qualifications For HELOCs on Rental Properties
There are several differences between HELOCs on primary residences and rental units:
• Tougher requirements: A HELOC is a second mortgage and some lenders may be reluctant to lend on an investment property.
• Higher interest and fees: HELOC interest rates on rental properties are always higher than on primary residences. Closing costs and fees will also be higher to cover the additional risk. Expect your interest rate to be at least one or two points higher than on a residential equity line of credit.
• Harder to find lenders: There are fewer lenders doing second mortgages on rental properties because of the elevated risk. You should check with our loan professionals to see if you can qualify for a HELOC on rental properties.
Other potential requirements for a HELOCs on investment properties are:
• High credit score of 680 or higher. LTV no more than 80%, but lower is better. This includes the balance on the first mortgage and what you would take out for the second. (if you have credit scores between 500 and 679, consider a bad-credit HELOC.
• Sufficient rental income and net operating income from your portfolio to pay the debt service for the loan and still have plenty of cash flow.
• Current tenant or tenants should be seasoned, meaning they have been paying rent for over a year.
• Features that make the unit easy to rent, such as having a dedicated home office.
• Enough cash in the bank for unexpected repairs, or longer vacancy than expected with an investment property HELOC.
A HELOC usually is interest-only during the draw period. After you enter the payment period, interest and principal are paid back. The rate on the HELOC varies based on the market, so you should be prepared for making higher payments in some cases.
Your lender will likely want to look at the income statement from the property, your balance sheet in real estate, and your rent roll to approve the loan. Your lender may want to know about your other investment properties you have and how they perform. Ask about the current second mortgage rates and always try and get the best HELOC rates available.
Sometimes you will be required to pay a little more in closing costs to get the lowest possible rate with a HELOC om an investment home, especially with investment properties. No closing cost home equity loans are typically reserved for borrowers using their primary residence, but it never hurts to ask.
HELOC Loan on a Investment Property vs. Primary Residence
While most lenders offer HELOCs or second mortgages on the home they live in, fewer provide HELOCs for investment properties.
Additionally, the eligibility requirements for an investment property HELOC are often stricter, and the interest rates are usually higher compared to those on an owner occupied residence.
So why pursue a HELOC on an investment property if it’s potentially more difficult and expensive?
You might prefer the lower risk of using your investment property as collateral instead of your primary residence.
Flexibility: Withdraw money as needed during the draw period with interest-only payments.
Lower Rates: Typically offers lower rates than a credit card or personal loan.
Reduced Risk: Less risky than tapping into the home equity of your owner-occupied home, as it doesn’t put the home you live in at risk of foreclosure.
Alternatives to HELOCs on Rental Properties
Many borrowers consider a fixed rate home equity loan or a cash out refinance to raise capital to buy an investment property or second home. People who have high rates on their first mortgage, typically choose to get a cash out refinance. If you have credit scores below 600, consider a low credit home equity loan. Conversely, people who already have a great interest rate on their existing mortgage, will typically avoid a cash out refinance and choose the home equity loan or HELOC. The personal loan is also an option, but the interest rates are higher and loan amount limits are usually too small to come up with down-payment on the purchase of an investment property.
Takeaway on Getting a HELOC for a Rental Property or Investment Home
A HELOC is a second mortgage on a rental property that functions much like a credit card. Funds are available to the investor as needed, with minimal restrictions from the lender on how the money can be used. Real estate investors might utilize a HELOC for various purposes, such as updating or rehabbing an existing rental property, or using the funds as a down-payment on another rental property. The credit line from a HELOC can be drawn upon and repaid multiple times until the draw period expires.
Getting a home equity line of credit on an investment property is possible if you have a successful real estate investing business and a solid credit score. Speak to one of our lenders about a HELOC on an investment property.
Investment property owners can explore the option of obtaining a HELOC based on the equity in their property. Nonetheless, securing a HELOC against an investment property may pose greater challenges in certain instances compared to obtaining one against a primary residence. It’s hard to deny the unique opportunity that HELOCs present for investment and rental properties.
It’s quite common for investors to use HELOC proceeds for various purposes, such as making a down-payment on a new property, expanding their property portfolio without taking on additional mortgage payments, or covering costs associated with a new loan. However, the flexibility of a HELOC allows you to use the money for any purchase, not just real estate. For instance, you can use a line of credit from an investment property to finance home renovation, or other business expenses. While HELOC money is not restricted to real estate investments, using them to acquire more properties can be an effective way to grow your portfolio. Here are some common ways investors utilize HELOCs.
BD Nationwide can assist you in locating lenders who provide home equity loan programs and HELOC credit lines for all types of properties. Whether you intend to occupy the home, rent it out or do a fix and flip transaction, we will help you find the lenders that best meet your needs. We will help you talk to banks and mortgage brokers that offer all types of home equity credit lines. Take advantage of aggressive lending programs with easy credit requirements loan to value guidelines with affordable mortgage rates free and reasonable HELOC loan fees.
