Using A HELOC For Investment Properties Made Simple

Using A HELOC For Investment Properties Made Simple

When you invest your money into real estate, there are numerous steps you can take to maximize your returns. One option that’s oftentimes overlooked by investors involves using a home equity line of credit (“HELOC”) with an investment property. By obtaining a HELOC with your investment property, you can gain access to the equity you’ve built up over time. These assets can be used to make improvements to the property, reduce the debt you owe, or purchase a new investment property. The following goes into more detail about this type of loan and how to qualify for it.

What Is a HELOC?

Home equity lines of credit are homeowner loans that provide applicants with revolving lines of credit that can be used to consolidate debt or make large purchases. This loan is backed by the equity you currently have in your investment property. The main difference between a HELOC and a standard mortgage is that the mortgage is usually paid out at closing. On the other hand, a HELOC provides the borrower with the opportunity to obtain a set amount of funds at the borrower’s preferred time.

The majority of HELOCs come with specific draw periods during which the borrower is able to use the credit they have. Another period of time is used for repaying the loan. It’s common for HELOC borrowers to be given a 5-10 year term when they only need to pay interest on the loan. The full repayment period can then last upwards of 10-20 years.

How a HELOC Can Be Applied to Rental Property

If you want to use a HELOC with your investment property, your property must first have enough equity in it that you can tap into. Equity is the difference between what you currently owe on your mortgage and what the property is worth. Once you’ve built up enough equity, a HELOC will become a great source of additional financing. With this approach, you can effectively build your wealth.

As an investor, you can use funds from a HELOC to make an investment into another rental property. You could also use this money to make improvements to the property, which should increase its value. Since the mortgages associated with rental properties tend to come with high interest rates, you may benefit from obtaining a HELOC on a primary residence to pay off the mortgage on your investment property.

Even though you can apply a HELOC to your rental property, there are certain difficulties that you might encounter. For instance, some lenders may be less likely to provide HELOCs on investment properties since defaults are more likely. Before you consider applying for a HELOC, you should look at the requirements you must meet to qualify for one, which are detailed below.

Qualifying for an Investment HELOC

If you want to qualify for this type of loan, you will need to meet certain requirements involving your credit score, debt-to-income ratio, and equity. When it comes to your credit score, lenders have relatively strict requirements when determining if you can qualify for a HELOC.

A higher credit score will invariably improve your chances of qualifying for this loan. Keep in mind, however, that lenders aren’t required to use the same guidelines. One lender may consider 700 to be a good score, while another lender may find 700 to be too low. In most cases, lenders will require a credit score of 740 or higher.

Your debt-to-income ratio is also important. This ratio will help you prove that you’re able to take out an additional loan without creating problems with the debt and income balance you currently maintain. Lenders usually have strict debt-to-income ratios that can be around 40-50%. If you owe a high amount of debt every month, you may be unable to qualify for a HELOC.

The third and final requirement involves the amount of equity you have in your investment property. Lenders tend to require a home equity amount of at least 15-20%. You may be able to qualify for a HELOC with less equity if you have a higher credit score.

Using a HELOC for your investment properties is a great way to gain access to more funds, which you can then use to improve the property or buy another one. As long as you meet the requirements mentioned above, you’re well on your way to being approved for a HELOC.