Can You Get a HELOC on an Investment Property?

Written by Banks Editorial Team
3 min. read
Written by Banks Editorial Team
3 min. read

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You have a sizable amount of equity in your investment property and want to explore ways to convert some of it into cash. Whether you’re looking to purchase additional investment properties, cover the cost of repairs or much-needed upgrades, consolidate high-interest debt or meet some other financial goal, you may be considering home equity loan products to get the funds you need. 

Home Loans and Mortgage Refinancing

Getting a HELOC for an Investment Property

A common choice is a home equity line of credit (HELOC), which gives you access to a pool of cash that you can pull from as needed during what’s known as the draw period. It usually spans between 5 and 10 years. 

A HELOC works like a credit card and acts as a second mortgage. But is it possible to get a HELOC on an investment property? It’s possible to get a HELOC for an investment property, but there are specific guidelines you must meet to qualify. 

Is It Different from Getting a HELOC for Your Primary Home?

The eligibility criteria for HELOCs on investment properties are far more stringent. This is due to the risk posed to the lender since borrowers are more likely to default on loan payments. 

When you take out a HELOC on your primary residence, you’re more likely to keep up with the payments to avoid foreclosure, even if you face financial difficulties. However, you could be more inclined to let an investment property go if it comes down to choosing between a HELOC payment and basic necessities. 

You’ll generally need a lower debt-to-income (DTI) ratio, a higher amount of equity and an excellent credit score. Many lenders also require a substantial amount of liquid cash reserves and a steady income from the property to get a HELOC on an investment property. 

Plus, the maximum acceptable loan-to-value ratio for HELOCs on investment properties is lower. And you can expect to pay a steeper interest rate to minimize the risk posed to the lender.

Plus, the maximum acceptable loan-to-value ratio is lower for HELOCs on investment properties. And you can expect to pay a steeper interest rate to minimize the risk posed to the lender. 

How to Get a HELOC on an Investment Property

Here’s what you need to know to get a HELOC on an investment property:  

Understand How Equity Works

To determine how much equity you have in your home, subtract the amount you owe on your mortgage from your property’s current market value. For example, assume your rental property is worth $500,000, and you owe $250,000 on the mortgage, giving you a loan-to-value ratio of 50% ($250,000/$500,000).

If the lender caps your LTV ratio at 80%, including your HELOC and monthly mortgage payments, your loan amount would be limited to $400,000 (80% * $500,000 = $400,000). you could receive a HELOC of up to $150,000 ($400,000 – $250,000). 

Your current amount of equity in your investment property is $250,000 ($500,000 – $250,000). 

Home Loans and Mortgage Refinancing

Assess Your Credit Score and Debt-to-Income Ratio

Credit scores and debt-to-income (DTI) ratios significantly impact your approval odds for a HELOC on an investment property. Lenders want to know your track record with handling debt, which is reflected by your credit score, and that you can afford to make the HELOC payments. 

Your DTI ratio is calculated by dividing the amount of your monthly debt payments by your gross monthly income. To illustrate, if your debt payments are $2,500 and your gross earnings are $7,500, your DTI is 33%. 

Generally, lenders require a DTI between 40 and 50% if you’re seeking a HELOC for an investment property. In this case, your DTI would be acceptable. 

Shop Around

Reach out to a reputable mortgage broker to inquire about HELOCs for investment properties. Most brokers have connections with lenders and can shop your information around to find options that could work for you.

You can also inquire with banks or credit unions in your area. Even if they don’t currently offer HELOCs to real estate investors, the banker may be able to refer you to a contact in the real estate community that can further assist you.   

Apply and Submit Your Application

Apply with several lenders to compare your options. Although each credit application results in a hard credit inquiry, it won’t damage your credit score if they’re all submitted within 14 days since the FICO credit scoring model permits rate shopping. 

Compare Lender Rates and Terms

Be sure to evaluate the interest rates, fees, loan terms and draw periods. Also, ask the lender about the payment structure and if they expect principal and interest or interest-only payments during the draw period. 

Negotiate with the Lender

You can skip this step if you get a funding offer that beats the others. Otherwise, consider reaching out to your top options to try and negotiate a better deal. Present the other offers and ask if they’ll beat them to earn your business. 

Access Your Property’s Equity with Low-Interest Rates

It can be challenging to qualify for a HELOC on an investment property, but that doesn’t mean you’re completely out of luck. You can do the legwork to find lenders who will work with you or explore other options to convert your equity into cash.

If you choose the latter, a cash-out refinance could be a viable alternative. Consider a direct lender, like loanDepot, to assist you with leveraging this low-cost option to pull out the funds needed to expand your portfolio of investment properties or meet other financial goals. 

loanDepot features some of the lowest refinance rates in the industry, and you will enjoy a fast, seamless application process. So start building the perfect loan product today by visiting the website and getting your rate. 

loanDepot also plans to launch an additional home equity product, the Mello HELOC, in the third quarter of this year.

loanDepot

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