Which Banks Do HELOCs on Investment Properties?

A Home Equity Line of Credit (HELOC) on an investment property offers a flexible financial tool for real estate investors. It functions as a revolving line of credit, allowing property owners to borrow against the equity in their non-owner-occupied real estate. This provides access to capital that can be drawn as needed, up to a predetermined limit. For those seeking to leverage their real estate holdings without selling properties, a HELOC can provide liquidity. This article explores the characteristics, qualification requirements, lender options, and application procedures for obtaining an investment property HELOC.

Features of Investment Property HELOCs

An investment property HELOC shares similarities with a primary residence HELOC but has stricter terms due to increased lender risk. Lenders impose lower loan-to-value (LTV) ratios, higher interest rates, and more fees. While primary residence HELOCs allow LTVs up to 85-90%, investment property HELOCs often cap LTVs between 70% and 80%. Interest rates are generally higher, reflecting the perceived higher risk.

These HELOCs feature a draw period, during which funds can be accessed, often lasting 5 to 10 years. During this period, borrowers make interest-only payments on the amount drawn, which helps manage cash flow. Following the draw period, a repayment period begins, ranging from 5 to 25 years, requiring both principal and interest payments until the balance is fully repaid. Borrowers can reuse the credit line as they repay the outstanding balance, similar to a credit card.

Real estate investors utilize investment property HELOCs for various strategic purposes. Common uses include funding renovations on existing rental properties to enhance value and rental income. Funds can also serve as down payments for acquiring new investment properties, allowing investors to expand portfolios without liquidating other assets. A HELOC can provide flexible working capital to manage cash flow fluctuations or cover unexpected expenses and emergency repairs.

Qualifying for an Investment Property HELOC

Qualifying for an investment property HELOC involves meeting specific financial criteria that demonstrate a borrower’s ability to manage the added debt. Lenders assess credit score, debt-to-income (DTI) ratio, and available equity. A strong credit history is required, with lenders needing a minimum credit score of 700 to 720 or higher, which is more stringent than for primary residence HELOCs.

Debt-to-income ratio is another significant consideration, with lenders preferring a DTI below 43% to 50%. This ratio helps lenders determine if a borrower has sufficient income to cover existing debts plus new HELOC payments. Lenders scrutinize the equity in the investment property, requiring at least 20% equity, with maximum loan-to-value (LTV) ratios ranging from 70% to 80% of the property’s appraised value. Some lenders consider the combined loan-to-value (CLTV) ratio, including the first mortgage and the full HELOC amount, aiming for it to be below 85%.

Applicants must prepare extensive documentation to support their financial standing and the property’s viability. This includes personal financial statements, recent tax returns (for the past two years), and pay stubs to verify income. For investment properties, lenders require property-specific documents like current leases, income and expense statements, and proof of long-term tenants to assess the property’s income-generating potential. An appraisal of the investment property is also a requirement to confirm its market value and available equity.

Finding the Right Lender

Identifying financial institutions that offer HELOCs on investment properties requires targeted research, as these products are not as widely available as those for primary residences. Different types of lenders cater to this niche market. Local banks and credit unions provide personalized services and may be more flexible, especially for existing clients. Regional banks and some national institutions also offer these products, though their requirements might be more standardized. Online lenders are another option, offering streamlined processes and faster approvals.

Prospective borrowers should proactively engage in thorough research to locate suitable lenders. This includes conducting online searches for “investment property HELOCs” and exploring the offerings of various financial institutions. Networking with other real estate investors, mortgage brokers, or financial advisors can yield valuable recommendations for lenders specializing in this area. Mortgage brokers, in particular, can help navigate the market and connect borrowers with lenders who fit their specific needs.

Once potential lenders are identified, prepare a list of key questions for initial inquiries. These questions should focus on the lender’s specific eligibility requirements for investment property HELOCs, including LTV maximums and credit score thresholds. Inquire about their interest rate structures, whether fixed or variable, and any associated fees like annual fees or early termination penalties. Understanding the application timeline, from submission to funding, can help manage expectations.

Applying for Your HELOC

Once necessary financial and property documentation is gathered and a suitable lender selected, the formal application process for an investment property HELOC can begin. The initial step involves submitting the complete application package, which includes personal financial statements, income verification documents, and property details. This submission occurs online or directly with a loan officer.

Following application submission, the lender initiates the underwriting process. This comprehensive review assesses the borrower’s creditworthiness and the investment property’s value. Underwriters conduct credit checks, verify income and employment, and scrutinize the property’s financial performance, requesting additional information or clarification if needed. An important part of this stage is the property appraisal, which determines the current market value and confirms available equity.

Upon approval, the lender prepares the loan agreement outlining the HELOC’s terms and conditions. The final stage involves closing procedures, where the borrower signs loan documents and pays any applicable closing costs. These costs can include appraisal fees, credit report fees, origination fees, and title search fees, ranging from 2% to 5% of the loan amount. The timeline for accessing funds for investment property HELOCs varies. While some online lenders promise access within a week, it may take several weeks to a month or more.