HELOC on an Investment Property: Requirements and How to Qualify
A home equity line of credit (HELOC) on an investment property can provide funds for almost any purpose, from home renovations to unexpected medical bills.
But to really put that equity to work, you could also use it to fix, flip or purchase another property. Using the equity from one investment property to finance the down payment on a new one can help boost your real estate portfolio — and your income.
What is a HELOC on an investment property?
What it is: A HELOC is a revolving credit line that uses your home as collateral. A HELOC on an investment property uses that property — rather than your primary residence — as the collateral.
Usually, any mortgage used to buy a property that you don’t live in, and that will produce rental income, is an investment property loan. The IRS considers a second home an investment property if you live in it for less than 10% of the number of days it was rented.
Learn more about current investment property loan rates.
How it works: Accessing HELOC funds is usually as simple as swiping a card, and you’ll typically pay less interest with a HELOC than you would a credit card, personal loan or home equity loan.
You’ll also have an initial “draw period” (usually lasting 10 years), during which you can use the credit line but make low, interest-only payments. After that, you’ll repay the balance owed in monthly installments at a variable interest rate.
HELOC on a rental property: What’s different?
- Rental income can be used to qualify. Most lenders will allow you to include some projected rental income in your qualification calculations. But you usually can’t count 100% of the projected rent — typically, lenders only count 75% to 80%.
- Tax deductible interest. Interest on an investment property HELOC should always be tax-deductible because it qualifies as a rental expense.
- Less loan availability. It can be harder to find lenders who offer HELOCs for investment properties than it is to find lenders for a HELOC secured by a primary residence.
- Tougher requirements. You may find that lenders hold you to a higher bar for HELOC qualification when the property securing the loan isn’t a primary residence. However, lenders have varying requirements, so it can pay to shop around if you’re struggling to qualify.
- Higher rates. Lenders may charge higher HELOC interest rates because investment properties are considered riskier collateral than primary homes.
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Loan requirements for investment property vs. primary home HELOCs
| Investment property HELOC | Primary home HELOC | |
|---|---|---|
| Debt-to-income (DTI) ratio maximum | 40% to 50% | 43% to 50% |
| Loan-to-value (LTV) ratio maximum | 80% | 80% to 85% |
| Credit score minimum | 720 | 620 to 680 |
| Cash reserves | You should have a significant amount of cash reserves (often six to 18 months’ worth). | Lenders may not require you to have cash reserves unless they feel you need to compensate for other factors, like a high DTI ratio. |
| Property occupancy | You should have a tenant in place and a documented rental income history. | You should be living in the property as your primary residence. |
| How it’s taxed | Only deductible if you use the funds to “buy, build or substantially improve” the property. | Deductible using IRS tax form Schedule E. |
Can you use a HELOC for a down payment?
Funds from a HELOC can make up some or all of your down payment on a new property.
Since investment property loans have higher down payment requirements, a HELOC can provide a much-needed solution when you’re low on cash.
If you’re willing to live at the property while renting out other units, you can also use what’s called “owner-occupied financing.” These loans, commonly used in house hacking, come with very low down payment requirements — you can put down just 3.5% if you use an FHA loan and 0% if you’re eligible for a VA loan.
Is a HELOC a good idea for real estate investors?
If you have significant equity in at least one investment property and want a flexible form of financing, a HELOC can be a good choice. Using equity to fund improvements or raise funds for a down payment on another rental are two of the best ways to leverage your home equity.
The large down payment needed to qualify for an investment property loan — typically 15% to 30% — can be a roadblock without HELOC or other funds supplementing your savings. However, once you’ve cleared that hurdle, an investment property can be a great way to build wealth.
How to get a HELOC for an investment property
1. Make sure you qualify
View the common minimum requirements for a HELOC on an investment property, versus one for a primary home, listed above. Keep in mind that some lenders may have stricter requirements.
2. Shop around for the best deal
Every lender has their own way of judging risk, so you’ll get slightly different rates and terms from each one.
While total cost — which includes interest rate and fees — is crucial when deciding which loan works best for your budget, it’s not the only factor to consider. Look at how long the draw periods are, whether you’d have the option to make interest-only payments during the draw period and if there are any prepayment penalties to worry about.
Even though you’re applying with multiple lenders, don’t worry about multiple inquiries impacting your credit score — it won’t be dinged as long as you apply with all of them within a 14-day window.
Learn more about our picks for the best HELOC lenders.
3. Negotiate with lenders
If there isn’t an obvious winner, contact some of the lenders and ask them if they can make a more competitive offer. Tell them about the offers that they’re competing against — by negotiating, you could get an even better deal.
Read LendingTree expert tips on how to negotiate with a lender.
Who offers a HELOC on an investment property?
HELOCs on investment properties aren’t as easy to find as HELOCs secured by primary residences. That said, some large national lenders — including TD Bank and Fifth Third Bank — do offer them. It can also pay to contact any credit union or local lender that you already bank with to ask if they offer any loan products that might suit your needs.
- Autopay discount available
- Ability to get a quote online
- Not available nationwide
- Doesn’t publish rates online
TD Bank loans are only available in 15 states, mostly on the East Coast and Washington D.C.:
- Connecticut
- Delaware
- Florida
- Maine
- Maryland
- Massachusetts
- New Hampshire
- New Jersey
- New York
- North Carolina
- Pennsylvania
- Rhode Island
- South Carolina
- Vermont
- Virginia
- Washinton D.C.
- Phone: 1-866-325-4516 or 1-877-700-2913
- In person: Locations and business hours vary
- Chatbot: You can ask general questions using TD Bank’s chat option on their website
- National bank with experienced advisors
- Excellent digital tools and content
- Branches concentrated in just 15 states
- Digital service is limited to 45 states
Digital service is available in 45 states (excluding Alaska, Hawaii, Mississippi, Montana, South Dakota and the District of Columbia).
In-person banking is currently available in 15 states (including at former Comerica Bank locations):
- Alabama
- Arizona
- California
- Florida
- Georgia
- Illinois
- Indiana
- Kentucky
- Michigan
- North Carolina
- Ohio
- South Carolina
- Tennessee
- Texas
- West Virginia
- Phone: 866-351-5353
- Email: Login to your Fifth Third account to send a secure message
- Website: 53.com
HELOCs on investment properties: Pros and cons
Pros
- Flexible: You only repay what you withdraw, plus interest.
- Reusable: You can repay and reuse the credit line as needed during the draw period.
- Low interest rates: Your interest rate may be lower than that of a credit card or personal loan.
- Wealth-building tool: You could use the funds to expand your investment portfolio.
- Personal security: You won’t lose your primary residence if you aren’t able to make your payments.
Cons
- Drained equity: You’ll lose a portion of the equity you’ve built in your rental property.
- Another debt: You’re adding another monthly expense to your plate.
- Costs and fees: You’ll likely pay closing costs, which may be deducted from your credit line.
- Variable interest rates: You may find it hard to budget for payments that can change as the market fluctuates.
- Collateral: You could lose your property to foreclosure if you default on your HELOC 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.
- HELOC on a primary home: You’ll face less stringent requirements and still enjoy the benefits of a HELOC if you use your primary residence as collateral.
- Home equity loan: Instead of a credit line, you can tap your investment property’s home equity and receive your payout in a lump sum. You’ll also enjoy a fixed interest rate, which means payments won’t change over time.
- Cash-out refinance: You’ll replace your investment property’s current mortgage with a larger loan and, ideally, lower your interest rate. At the same time, you’ll get a lump sum that you can use as you wish. The amount you take out in cash is added to your outstanding mortgage balance.
- Personal loan: You don’t need any home equity to qualify for this loan type. Instead, unsecured personal loans rely only on your credit report and credit history. If approved, you’ll get a lump sum to use for any purpose. Because it’s unsecured, however, average interest rates can be higher.
- Credit card: You don’t have to put up any collateral and can qualify based only on your credit history and score. However, credit cards typically come with high variable interest rates, so your balance can snowball quickly if you don’t pay the card off in full every month.
- Cross-collateralization loan: If you already have multiple investment properties, you can group them together and pool your equity to access a larger credit line. This means you won’t have to deplete the equity from one property.
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