Can you get a HELOC on an investment property?
Taking out a HELOC on an investment property could help you access cash without reducing the equity in your primary home. Plus, investment and rental homes in desirable areas often see their values rise quickly — giving owners a substantial amount of real estate wealth to tap into.
On the downside, it can be harder to find investment property HELOC lenders. And the requirements to qualify are stricter. But if you’re eligible, this could be a smart way to get the cash you need.
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What to know about investment property HELOCs
It’s possible to get a home equity line of credit (HELOC) on your investment property. But there are a few things you should know first.
Requirements are stricter
Lenders may require higher credit scores (720-740), lower debt-to-income ratios, and bigger cash reserves to qualify for an investment property HELOC. In addition, you can likely only borrow up to 75% of your property value, compared to 85% or 90% when using a HELOC on a primary residence.
Interest rates are higher
Investment property mortgage rates are almost always higher than interest rates on a primary residence. You can usually expect to pay 0.5% to 0.75% above current market rates. The same principle is true for HELOCs, so be sure to shop with multiple lenders and find the lowest rate you can qualify for.
There are fewer options
While many mainstream lenders offer HELOCs, not all of them will do a HELOC on an investment property. As second mortgages, HELOCs are already considered higher risk. And taking the credit line on a rental property doubles down on that risk for lenders. So fewer are inclined to offer this option.
Look for major nationwide lenders offering investment property HELOCs (we list a few below), but also explore local options. You might find a credit union or small bank willing to help you out. Or, contact a broker that works with multiple mortgage lenders and can help you shop around for your HELOC.
Investment property HELOC requirements
Qualifying for a HELOC on a second home or an investment property is a little tougher than getting one on your primary home. According to experts, you typically need:
- More than 25% equity accrued in the property
- A loan-to-value ratio that doesn’t exceed 75%
- A credit score of 720 or higher, in many cases
- A debt-to-income ratio of 43% or lower
- Cash reserves of at least six months
Cash reserves are savings you have banked in case of emergency. Lenders usually want to see substantial cash reserves when you get a loan on an investment property because you need to be able to cover your mortgage payments if the property stops generating income for a period of time.
“Lenders like to see that you have at least 2% of your unpaid principal balance or the remaining balance on your mortgage saved up and readily available in emergencies or in case of rental income shortfalls in order to qualify for a HELOC on an investment property,” says Levon Galstyan, a CPA associated with Oak View Law Group and a consumer finance expert.
In addition, HELOC lenders may want to see proof of positive cash flow on the investment property.
“If it’s an existing rental property, you may need to furnish proof to the lender that the investment property is already generating income and will continue to do so for the foreseeable future,” says Dennis Shirshikov, a strategist at Awning.com and a professor of economics and finance at City University of New York.
What lenders offer HELOCs on investment properties?
The good news is that HELOCs are offered by a wide variety of financial institutions, including national banks, community banks, credit unions, online lenders, and mortgage brokers.
The bad news is that it’s more difficult to find a lender willing to approve HELOCs for investment properties. That’s because it’s a bigger risk for the lender — especially if there is an unsatisfactory history of rental income generated by the property. Willing lenders may end up charging you more for an investment property HELOC in the form of a higher interest rate and/or increased fees.
Based on our research, a few nationwide lenders that may offer HELOCs on investment properties include:
- Wells Fargo
- Bank of America
- US Bank
- PenFed Credit Union
- Alliant Credit Union
- Fifth Third Bank
- TD Bank
This is by no means an exhaustive list, only a place to get started. We’d recommend looking at these as well as local lenders; membership-based banks like credit unions can sometimes offer a wider variety of HELOC products and may be more accommodating about requirements and HELOC loan limits.
How to get HELOC on an investment property
To get a HELOC on your investment property, follow a few simple steps:
1. Determine how much equity you have
Remember that when you take a HELOC on an investment property, you’ll likely need to leave 25% of your equity untouched. So you need more than 25% accrued to qualify.
For example: Say your rental property is worth $500,000 and you own $300,000 on the original mortgage. You have $200,000 in home equity, or 40%. If your lender’s maximum loan-to-value for an investment property is 75%, the most you can borrow in total is $375,000. After subtracting the existing mortgage amount ($300K), you’re left with a maximum potential HELOC amount of $75,000.
Your home equity level “can be calculated by subtracting any outstanding mortgage balance from the current market value of your property,” says Boyd Rudy, associate broker with Dwellings Michigan. The lender will likely require an appraisal to determine your property’s current value, but you can use the purchase price or an online estimator like Zillow to get a ballpark number.
2. Gather financial documentation
Applying for a HELOC requires the same slate of financial documentation as any other mortgage loan. Ensure you have all the paperwork a lender may request, including:
- Proof of employment and income
- Bank statements
- Other financial account statements
- Proof of rental income on the investment property
- Recent tax returns
Having all your paperwork together before you apply will help the process go a lot more smoothly.
3. Shop around for lenders and rates
You can look for HELOC lenders online and/or at brick-and-mortar financial institutions and get preapproved. Experts recommend getting preapproved with at least three different HELOC lenders so you can find the best deal on your loan. Compare loan offers and terms carefully, including the initial interest rate, draw period, repayment period, costs, fees, penalties, and restrictions (if any) about how the money can be used.
4 Formally apply for HELOC
Once you choose a lender for your HELOC, you’ll complete a full application. You’ll provide financial documents and personal information, and the lender will order an appraisal (either a digital or in-person one) to determine the property value. Then your lender’s underwriting team will evaluate the application to ensure you and your investment property qualify for the requested loan amount.
5. Get final approval and close
It may take between two and six weeks to get approved for a HELOC — possibly longer if the loan is for an investment property. Be sure to stay in touch with your lender and respond to any requests for additional information as quickly as possible. This will help you avoid unnecessary delays in the processing time and help you get your cash faster.
Pros and cons of a HELOC on an investment property
A HELOC can be a cheap way to get access to cash. And it may be tempting to borrow from an investment property so you’re not reducing the equity in your primary home. But there are both pros and cons to consider before going this route.
|Protects equity in your primary home||Fewer lenders and loan options|
|Funds can be used for anything||Higher interest rates|
|You can use the credit line as needed||Stricter guidelines to qualify|
|Interest-only payment period||May face a balloon payment|
Investment property HELOC pros
One of the biggest benefits of getting a HELOC on an investment property is that it doesn’t put your primary home on the line. You won’t risk losing the house you live in if you can’t repay the line of credit as agreed upon.
Another benefit? You can use the funds for just about any purpose — from home improvements or renovations to consolidating debt, creating an emergency fund, or even buying additional investment properties. You might even qualify for a tax deduction if you use your HELOC to purchase or improve a property (but check with a tax advisor for specifics).
What’s more, with a HELOC you only tap into your equity and use the funds if and when you need them. Once approved, you aren’t required to use the credit line if you don’t need it.
By contrast, if you pursue a home equity loan, cash-out refinance, or personal loan, you get your money in a lump sum at closing and must begin repaying those borrowed funds soon afterward.
Investment property HELOC cons
On the downside, taking a HELOC on an investment property is generally more expensive than borrowing against your primary residence. Interest rates tend to be higher for investment and rental properties across the board. So while this might feel like a safer prospect, you could end up paying substantially more.
It’s also tougher to qualify for this kind of HELOC. “There are [much] stricter requirements on HELOCs for an investment property than there are for a primary residence, and you may need to look harder to find a lender who offers HELOCs to investors,” says Leonard Ang, owner of iPropertyManagement. A limited selection of lenders also makes it more difficult to compare options and find a lower interest rate.
Keep in mind that HELOC interest rates are variable, meaning your rate and payment can rise or fall with the market. When the Fed hikes interest rates, HELOC rates go up, too. By contrast, alternative options like a home equity loan or cash-out refinance come with fixed rates and predictable monthly payments.
Finally, depending on your HELOC’s terms and how much you borrow from the credit line, you might have to make a large balloon payment after your draw phase ends.
How an investment property HELOC works
A HELOC on an investment property works the same as it does on a primary residence. It’s a revolving line of credit that uses your home equity as security. But instead of using your primary residence to back the loan, you can use the rental property.
As always, the amount you can borrow will depend on your property’s value, your existing mortgage amount, your credit score, and current interest rates, among other factors.
With a HELOC, you have a draw period that typically lasts the first 10 years. Over this time, you can extract money (equity) from your line of credit any time you want, provided you don’t exceed your set credit limit.
During the draw period, you are only obligated to make minimum interest payments on any money you borrow from the credit line. Borrow no money and you will owe nothing (unless your lender charges an inactivity fee). After your draw phase concludes, you aren’t allowed to borrow additional cash unless your lender authorizes a HELOC renewal.
The next phase is the repayment phase, often lasting 10 to 20 years, over which time you must pay back your owed balance with interest. Since HELOC rates are variable, your monthly payment could go up and down throughout the repayment period.
Investment property HELOC FAQ
If you already own a rental property and have built a sufficient amount of equity (usually more than 25%), you can pull equity out of it using a HELOC, home equity loan, or cash-out refinance. Keep in mind that lenders require better credit scores and higher equity levels to cash out an investment property than they do for a primary residence.
Yes. If you qualify, you can obtain a HELOC on a rental property. This assumes you already own the rental property, have sufficient equity in it, and can use it as collateral. If not, you can get a HELOC on your primary residence and use the funds to help purchase and/or improve a desired rental property.
It’s possible to get a home equity loan on your investment property. Similar to an investment property HELOC, these will have higher rates and stricter requirements than a loan on your primary residence. In addition, it’s harder to find lenders that offer second mortgages on rental homes.
Yes, you can use the funds from a HELOC to buy an investment property. The money you borrow can, for example, be used for the down payment on an investment property purchase; for repairs, upgrades, and improvements on your investment property; or for virtually any other purpose you choose. In general, once you’re approved for a HELOC, there aren’t restrictions on how you can use the funds.
If you’re borrowing against an investment property, lenders usually require you to leave 25% of your equity untouched. That means you’ll need significantly more than 25% to make a HELOC worthwhile. The rules are more lenient for a primary residence; you may be able to borrow up to 85% or even 90% of the home’s value in that case.
Your next steps
It pays to shop around with several different HELOC lenders and consider alternatives, too.
If you don’t qualify for a HELOC on an investment property or the costs are too high, think about applying for a second mortgage on your primary residence instead. You might also get the cash you need using a personal loan or credit cards, though interest rates on these unsecured borrowing options are far higher than mortgage rates.
Still, “Investors [may] prefer to get a HELOC because the cash isn’t sitting idly by if there are no investment opportunities, and the payments to service the debt are much lower early on with a HELOC,” notes Shirshikov.
Get in touch with a HELOC lender to learn what you qualify for an explore all your options.