Can you get HELOC on an investment property? – Adviser to Forbes

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Investment properties are a great way to invest your money to work for you. And if you have enough equity in your home, you may want to consider drawing an equity credit line (HELOC) on your investment property.

Although it is possible to get HELOC on an investment property, it is not quite the same as getting HELOC on your main home. Here’s how you can use HELOC for investment property and what you need to qualify.

How to get HELOC for investment property

HELOC is a revolving credit line that you can use whenever you need to make purchases or home improvements. However, HELOCs are not as common in investment properties, so not many lenders offer this product. But for those who do, credit requirements may be higher than for your primary residence, and investment properties require at least a good or excellent credit rating.

Other potential requirements include:

  • Loan to value ratio (LTV) up to 80%
  • Cash reserves worth several months in your bank account
  • Proven income from tenants (if used as a rental property)

Because every lender is different, you will want to ask your potential lender what his debt-to-income ratio (DTI) requirements are, and how much equity you need in your investment property.

Creditors offering HELOC on investment property

Although not all lenders offer HELOC for investment properties, some do. Here’s where to look:

  • Traditional banks
  • Local banks and credit unions
  • Credit brokers
  • Online lenders

Using HELOC to deduct investment property tax?

It depends on what you are using this HELOC for. If you take HELOC on your investment property and use these funds for home-related expenses, you can write off these expenses on your taxes. However, if you have used HELOC for other expenses, such as debt consolidation or training, it cannot be deducted from your taxes.

Alternatives to using HELOC for investment property

If you do not qualify for HELOC for your investment property or cannot find a lender for your needs, you have other options when it comes to using your equity.

Equity loan

The equity loan (HEL) is similar to HELOC, but instead of a revolving credit line, you will receive your money in a lump sum. If you know how much you need to borrow and you can get it all at once, this may be the right option for you. But like HELOC, HELs may not be as widely available as some other options.

Refinancing for cash payments

Cash-on refinancing replaces your current mortgage with a new one, but you pay off the equity you have earned. You will usually need to have about 20% equity left in the home to refinance it, although this figure may vary depending on the lender.

As this is a new loan, your terms and interest rate will change. For example, you can extend the terms of the loan to have lower monthly payments, or shorten them to repay the loan earlier. Don’t forget about the closing costs, which can cost you from 2% to 5% of the amount of the new loan.

If you can secure a lower interest rate than you currently have, refinancing with cash for your investment property may be worth it. But if you don’t have enough equity in your home, you can’t afford the cost of closing it, or you don’t have a solid loan to qualify – refinancing with cash may not be worth it.

Personal loan

A personal loan can be used for almost anything. Most personal loans are also unsecured, which means that you do not need to provide collateral to get a loan. This is attractive to borrowers who are worried that they may lose their investment property if they fall behind in payments.

Because there is no collateral for the loan, lenders only have your credit history to determine your creditworthiness. So personal loans usually have higher interest rates than HEL, HELOC and cash refinancing.

The terms of the loan may also be shorter than other options. HELOC and HEL can last up to 30 years, similar to mortgages. However, most personal loan terms vary from one to five years, but this duration varies greatly depending on the lender.

Find the best lenders for housing loans for 2022

Eventually

If you are thinking of getting HELOC for your investment property, you can qualify with several selected lenders. But with strict credit rating requirements, DTIs and huge amounts of cash reserves, you may want to consider alternatives.

If you are still struggling to qualify for a loan or other loan options, take the time to improve your credit rating, pay off some outstanding debts, or increase your cash reserves. It may take extra work, but you can get HELOC – or another type of loan – to finance your investment property.

Find the best lenders for housing loans for 2022

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