Using a HELOC on a Rental Property or Investment Home

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 requirements are more challenging than for your personal residence.

Can I Get a HELOC Line of Credit on a 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. 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.

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 on the rental property to get a higher rent each month.
• Write checks from 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 rental property.
• Using the HELOC funds on a new rental property.

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Other 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 a HELOC to buy a rental property or investment home. This means the purpose of the HELOC funds is to meet the down-payment requirements of the investment property or second home.

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. 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 home 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 a rental property.
Other potential requirements for a HELOC on an investment property 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.

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 on a HELOC, especially with an investment or rental property. No closing cost home equity loans are typically reserved for borrowers using their primary residence, but it never hurts to ask.

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 refinance to get the cash out. Conversely, people who already have a great interest rate on their existing mortgage, typically choose the home equity loan or HELOC.

Takeaway on Getting a HELOC for a Rental Property or Investment Home

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 today for your investment property.

BD Nationwide can assist you in locating lenders who provide 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. 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.

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