Can You Get a HELOC on an Investment Property?

A Home Equity Line of Credit, commonly known as a HELOC, is a revolving line of credit secured by the equity in your home. It functions much like a credit card, allowing you to borrow funds as needed up to a set limit, repay the amount, and then borrow again during a specified draw period. While often associated with primary residences for purposes like home improvements or debt consolidation, leveraging property equity extends to investment properties as well.

Eligibility for Investment Property HELOCs

It is possible to obtain a HELOC on an investment property, though the process often presents more complexities compared to a primary residence. Lenders allow HELOCs on income-generating properties such as single-family rentals or multi-family properties with up to four units. Commercial properties, raw land, or properties under construction are usually not eligible for this type of financing.

A fundamental requirement for any HELOC is demonstrating sufficient equity in the property. Lenders perceive investment properties as carrying a higher risk due to the borrower not residing there, which can influence the availability and terms of these financial products.

Specific Lender Requirements

Lenders impose specific criteria when evaluating a HELOC application for an investment property, which are often more stringent than for a primary residence. A primary factor is the loan-to-value (LTV) ratio. For investment property HELOCs, LTVs range from 60% to 80%, requiring more equity than for a primary home.

A strong credit history is another significant requirement, with lenders seeking a credit score of 720 or higher for investment property HELOCs. This is often elevated from the 680-range accepted for primary residence loans. The borrower’s overall debt-to-income (DTI) ratio is also closely scrutinized, needing to be below 40% to 50% to demonstrate repayment capacity.

Lenders assess the investment property’s rental income to determine its ability to support the additional debt. They may require documentation such as current and past two years of tenant rent rolls, lease agreements, and property income and expense statements. Borrowers are expected to have substantial cash reserves, enough to cover six to eighteen months of mortgage payments, as a buffer against vacancies or unexpected expenses.

Some lenders may favor borrowers who possess prior experience as landlords or in real estate investment, viewing it as an indicator of financial acumen and reduced risk. Preparing for the application involves gathering extensive documentation, including personal and business tax returns, bank statements, existing mortgage statements, and a recent property appraisal.

How Investment Property HELOCs Differ

HELOCs secured by investment properties exhibit several distinctions when compared to those on primary residences. Interest rates are higher for investment property HELOCs, reflecting the increased risk perceived by lenders. Rates might be several percentage points above those offered for owner-occupied homes.

Borrowers should anticipate higher fees and closing costs. These can include origination fees, ranging from 0.5% to 5% of the loan amount, annual maintenance fees, or early termination penalties. Some lenders may waive certain fees.

The available loan amounts for investment property HELOCs are lower due to the more conservative LTV ratios applied, meaning you access a smaller percentage of your property’s equity than with a primary residence HELOC. The underwriting process is more rigorous, with lenders reviewing the property’s cash flow, rental history, and the borrower’s overall financial stability.

The market for investment property HELOCs is more limited, with fewer lenders offering these products compared to primary residence HELOCs, necessitating more extensive research to find a suitable financial institution. Regarding tax implications, the deductibility of interest on an investment property HELOC depends on how the funds are utilized. Interest may be deductible if the funds are used to buy, build, or substantially improve the investment property itself.

The Application and Approval Process

The journey to obtaining an investment property HELOC begins with identifying lenders experienced in investment property financing. Research national banks, local credit unions, and specialized real estate investment firms, as not all institutions offer these products. Establishing a relationship with a lender where you already have accounts may provide an advantage.

After initial research, many lenders offer a pre-qualification or pre-approval step, providing an informal assessment of your eligibility based on preliminary financial information. This helps determine the likelihood of approval and potential loan terms before a formal application. The formal application involves submitting all required documentation, including detailed financial statements, tax returns, and property-specific information like rental agreements.

Following application submission, the lender initiates its evaluation process, which includes a property appraisal to determine its current market value. Underwriting involves a thorough review of your financial documents, creditworthiness, and the property’s income-generating potential to assess the risk.

Upon approval, you will proceed to the closing phase, involving reviewing and signing various loan documents. The closing process can take weeks to over a month, varying by lender and application complexity. After closing, a mandatory three-day right of rescission period applies. After this period and fund disbursement, you can access the HELOC funds as needed, often through checks, a dedicated debit card, or online transfers.