Why it is harder to get HELOCs on Investment Properties

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According to the National Association of Realtors, the median price of a single-family house in the United States in February 2022 was $363,000. This is a 15.5% increase over February 2021. Many homeowners have substantial equity that they can borrow against to get quick cash via a home equity credit (HELOC). This is due to an increase in home prices in all parts of the country.

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You might consider a HELOC for your investment property if you want to access funds to improve your home, consolidate debt or purchase another property.

Is it possible to get a HELOC for an investment or rental property?

Although it is possible to obtain a HELOC for an investment property or rental property it is more difficult to locate one and get approved. Lenders see them as having higher risk than if they were for your primary residence. Because you don’t live there, it’s assumed that you are less likely to pay your bills on time.

Monick Halm, a Real Estate Investor Goddesses founder and expert on investment properties, says, “With an owner-occupied [property], the bank is assuming that since you live there, it’s going to make sure that you pay for it so that you don’t loose the house.” They don’t see the same incentive with non-owner-occupied properties.

How to get a HELOC for an Investment Property

Lender requirements for obtaining a HELOC on any property, principal or investment, vary. However there are some things lenders will look at when considering an application.

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Home equity and loan to value ratio: Your home equity is the amount of your home that you actually own. LTV (loan-to-value ratio) is one method to determine your home equity. It is calculated by subtracting your current mortgage balance from the appraised value. HELOC lenders will typically allow you to have a maximum LTV of between 80% and 90%. This means that your home must have between 10% to 20% equity.

Your debt-to income ratio (DTI), is your ratio of your total monthly debt obligations to your monthly gross income. Your DTI is a measure of your ability to borrow money. It shows lenders that you are less likely to take on more debt than you need.

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Credit score: Based on your credit reports, your credit score helps lenders determine your likelihood of repaying your debts and the riskiness of lending you money. Higher credit scores will make you more eligible for a HELOC and lower your rate.

Cash reserves: Before granting you a HELOC, some lenders might require that you have cash reserves. This is so you can cover unexpected expenses and not default on your loan immediately if you need it.

Lenders will typically have stricter requirements when you take out a HELOC for an investment property rather than a primary residence. A lower loan-to value ratio (meaning you have more equity in your property), a lower debt-to income ratio, a higher credit score and more cash reserves may be required to get approved for an HELOC on investment property. Lenders will have different requirements, so it might be difficult to determine the exact requirements until you apply.

Halm explains that lenders might also be interested in a long-term tenant for your investment property. She says that lenders are more interested in a long-term than a short-term lease and then want the property to be occupied. They will also need proof of income.

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Halm says that the lender will also need information about other properties. She says, “They want you to be sure that you are not using [the HELOC] for debt reduction on other mortgages that you owe.”