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How to Get a HELOC on an Investment Property
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A home equity line of credit (HELOC) on an investment property can provide an on-demand, cost-effective source of cash you can use for almost any purpose, even as the down payment on a new rental property. Still, there are strict qualification limits and potential pitfalls with this loan product.
How to get a HELOC on an investment property
1. Meet strict requirements
Here are the common minimum requirements for the borrower and property for a HELOC on an investment property, versus one for a primary home. Keep in mind that some lenders may have stricter requirements.
|Investment property HELOC||Primary home HELOC|
|Debt-to-income (DTI) ratio||Your personal DTI should be under 40% to 50%.||Your personal DTI should be under 43% to 50%.|
|Loan-to-value (LTV) ratio||You need to maintain at least 20% equity in an investment property.||You need to maintain at least 15% equity in your home.|
|Credit score||You should have at least a 720 to 740 minimum credit score.||You should have at least a 620 credit score.|
|Cash reserves||You should have a significant amount of liquid cash reserves (often at least 18 months’ worth).||Most lenders will verify your assets, including your cash reserves.|
|Property occupation||You should have a tenant currently paying for the space and a history showing steady income from the property.||You should be living in your primary residence.|
→ Tip: Consider alternatives. If you don’t meet the above requirements, take a look at the alternatives highlighted below.
2. Shop around
It doesn’t hurt your credit score to apply with multiple lenders any more than it does to apply to one, as long as you do all of your applications within a 14-day window. Because every lender has their own way of judging risk, you’ll likely get a different offer from every lender to which you apply. By applying with multiple HELOC lenders, you have the chance to compare multiple offers.
LendingTree allows you to fill out one form and receive up to five HELOC offers.
Sit down with the offers you’ve received and compare them. Look at how much each option will cost, how long the draw periods are and whether you’d have the option to make interest-only payments during the draw period.
If there isn’t an obvious winner, contact the lenders of your choice and ask them if they can make a more competitive offer. Tell them about the other lenders’ offers that they’re competing against. By negotiating this way, you could get an even better deal than you originally received.
Pros and cons of getting a HELOC on an investment property
You only repay what you withdraw, plus interest.
You can repay and reuse the credit line as needed during the draw period.
Your interest rate may be lower than that of a credit card or personal loan.
You could use the funds to expand your investment portfolio.
You’ll lose a portion of the equity you’ve built in your property.
You’re adding another monthly expense to your plate.
You’ll likely pay closing costs, which may be deducted from your credit line.
You could lose your property to foreclosure if you default on your payments.
Alternatives to investment property HELOCs
Don’t think a HELOC on an investment property is the right fit for you? Here are some alternatives you may find useful.
- HELOC on a primary home: This financial product has less stringent requirements and offers many of the same benefits.
- Cash-out refinance: In a cash-out mortgage refinance, you would ideally lower your interest rate and get a lump sum of cash in your pocket. Because the loan is secured by a primary mortgage, the interest rate can be lower than a rate on an investment property cash-out refi. The amount you take out in cash is added to what you already owe on your mortgage.
- Personal loans: You don’t need any equity to qualify for this type of loan. Unsecured personal loans rely only on your personal credit information and provide a lump sum of cash for you to use for any purpose. Because it’s unsecured, however, average interest rates can be higher.
- Credit cards: A cross between a personal loan and a HELOC, a credit card relies only on your credit history — but instead of a lump sum, it gives you an on-demand line of credit, and you’ll only pay interest on what you borrow. However, if you don’t repay the credit card balance in full every month, the interest rate on your outstanding balance can be very high.
- Cross collateralization: When you have multiple real estate assets, this type of loan allows you to group them and pool your equity so you can access a larger line of credit without depleting the equity from one property.