HELOC on Rental Property: A Complete Guide

It’s not easy to secure a home equity line of credit (HELOC) on a rental property, but it’s very much possible. If you’re in a strong financial situation and can find a lender willing to grant you the property loan, half the battle is won. Learning how to use a HELOC on rental property will give you a competitive advantage as well as tons of benefits.

This guide will help you understand all the secrets behind securing a HELOC on your investment property. 

Although securing a home equity credit line may be difficult, as it generally poses a higher risk for the lender, the rewards are almost always worth the time, effort, and resources. 

It can be a great source of funding for updating your house, raising your credit, reducing your debt, or even buying a new property. Moreover, it effectively doubles the size of your credit card, especially if you already own both a primary residence and a rental property. 

But, in the aftermath of the current financial crisis, the lending requirements on investment assets have been substantially tightened. Borrowers now find it harder to receive rental-based credit than a HELOC on a primary residence. 

The reason why lenders are reluctant to give HELOC on rental property is that if by any chance the borrower faces financial difficulties, they will almost always make mortgage payments on their primary home. But, an investment property will be second or third in line!  

Moreover, in case the borrower claims bankruptcy, the major part of proceeds from selling any assets will go towards paying first mortgages.

But, like we said earlier, such a HELOC is not impossible. 

Let’s explore the ins and outs of a HELOC. 

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What is a HELOC?

A home equity line of credit is a type of loan for homeowners who wish to borrow money against the equity in their home in order to buy a property or plan a major home renovation, upgrade, or repair work. 

The loan works almost like a credit card — giving you access to a line of credit instead of a lump sum amount of money. A HELOC typically has a draw period where the borrower uses the credit and then a repayment period where they must repay the loan — the principal amount plus the interest on what’s spent.

How to find a lender for your HELOC on rental property?

The best way to find a lender who’s willing to give an investment property HELOC is to leverage your connections. Keep in mind that not all lenders and financial institutions grant HELOCs for rental properties. Most investors rely on word of mouth referrals to learn more about HELOC providers. 

Aside from that, they can research lenders online. The next step is to get all the approval requirements and the best interest rates.

Read more: What Home Lenders Should Tell You

How do you qualify for a HELOC on a rental property

The method of applying for an investment property HELOC is the same as for any loan, but the requirements are likely to be more strict.

Experts believe that there are some typical qualifications that lenders look for while granting HELOC on rental or investment property. These include:

• A credit score of 680 or more (the higher the credit score the easier it is to qualify for a HELOC)
• A minimum debt-to-income ratio of between 40 and 50 percent
• List of the rental properties with proper lease
• A good home equity
• A minimum ownership period of 12 months for the investment property 
• Proof of a significant amount of funds in the bank
• A history of fruitful real estate investments

Take a look at our comparison guide: Home Equity Line Of Credit Vs Personal Loan

What are the HELOC costs on an investment property?

When it comes to HELOC on rental property, you can expect to pay more than you would for a HELOC on a primary residence. The interest rates tend to be higher. 

Additionally, some lenders may even require you to pay closing costs, application fees, appraisal fees, and attorney documentation fees. Moreover, the loan term may also be stricter. 

Many lenders insist that the total loan-to-value (LTV) ratio on the property reaches only about 80% (it can go as high as 100% in HELOC on a primary residence). Keep in mind that LTV is calculated by dividing the amount you owe on the property by its value. 

Everything you need to know about a home renovation loan

Advantages of using a HELOC for investment property

Using the equity in a home or a rental property to finance your home improvement projects or cover unexpected expenses can be a great funding option for those who are financially secure. 

Here are some benefits of using your home as a valuable tool:

• If your loan is secured by a rental property, the mortgage interest becomes a rental expense. It can be used to reduce your taxable income.
• The interest you pay on a home equity loan is usually tax-deductible if you use the money for home-related projects.
• It’s one of the best ways to consolidate your credit card debt or cover unexpected medical expenses. Although the interest may not be tax-deductible HELOC interest rates are typically lower than other debt consolidation vehicles. 
• If you’re a homeowner or investor who needs money as soon as possible for short-term expenses, tapping into your HELOC can be helpful. 
• When your HELOC application is approved and you begin consistent monthly payments on the loan, the account will show favorably on your credit report — improving your credit score. And, if you use less than 30 percent of your line of credit spending limit, your credit ratings will improve too.

Read more: Increase HELOC limit

What are the alternatives to HELOC on rental property?

If you don’t qualify for a HELOC on rental property, maybe it’s time to look at some other products besides home equity loans. These include: 

• Cash-out refinance: This refers to rewriting an existing mortgage for a higher amount and receiving the excess funds at closing. Since the risks are lesser for the lender, the rates and terms are more favorable.
• Cross-collateralization: This allows you to group two or more properties under the same overarching loan — giving you easy access to the equity in your investment properties. However, it can be difficult to separate interest and debts later on.
• Unsecured personal loans: This signature loan is perfect for those who do not want to leverage their home equity. Since there’s no collateral involved, there are higher interest rates — depending to a large extent on your credit score and debt to income ratio.

Read more: Types of Home Loans: Which One Is Right for You?

Written by Ramona Sinha. May 27, 2020

Ramona is a content writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. An avid traveler, she’s a digital nomad at heart and an animal lover from the depths of her soul.