Can you get a HELOC on an investment property?

Investment properties need the same maintenance and upkeep as primary homes. If you're ready to make some upgrades or improvements to your rental property, you might wonder if you could use your equity to pay for it. A home equity line of credit (HELOC) lets qualified borrowers access cash to fund home-related projects or anything else. 

What is a HELOC? It's a credit line that's secured by your home. The better question is, can you get a HELOC for an investment property? And if so, how hard is it to qualify?

We'll guide you through HELOC requirements for investment properties and when it might make sense. 

Can you get a HELOC on an investment property?

Yes, you can get a HELOC on an investment property but it's less common than getting a home equity line of credit for a primary residence. It's also generally more difficult to qualify for a HELOC on an investment property since these lines of credit present a greater risk to lenders. 

Here's a quick explainer on the differences between an investment property and a primary home:

• An investment property is real estate intended to earn income or investment gains through long-term appreciation. Appreciation means the home increases in value while you own it.

• A primary residence is the home you live in full-time. 

Examples of investment properties include single-family homes, condos, townhomes, and apartments. Investment properties are rented to one or more tenants and in most cases, aren’t owner-occupied. If you own a multi-unit home, like a duplex, triplex, or quadplex, you could live in one unit and rent out the others. 

Why are HELOCs on investment properties different? It comes down to risk. Lenders can impose tighter standards to make sure they offer HELOCs to the most qualified borrowers. 

Why investment property HELOCs can be harder to qualify for

Investment property HELOC requirements are generally tougher compared to traditional HELOCs. Generally, borrowers need to have:

• More equity in the property

• Higher credit scores

• Less debt 

• More cash in the bank 

The amount of rental income the property generates could also be part of the lender's decision. 

Lower max loan-to-value (LTV/CLTV) is common

LTV and CLTV are shorthand for loan-to-value and combined loan-to-value ratios. Both measure how much equity you have in an investment property, but in different ways. 

• LTV is what you owe on the property's primary mortgage, divided by its value.

• CLTV is the total of all loans on an investment property, including a primary mortgage and a HELOC, divided by its value.

The max LTV and CLTV for an investment property HELOC are typically lower than for a HELOC on a primary residence. For example, you might get a home equity line of credit on your primary home with a max LTV of 90%. The cap for a HELOC on an investment property might be 75% instead. 

Here's what that means for you in simple terms: you'll likely need to have more equity in the investment property to get a HELOC on it. Lenders have varying caps, which you may notice if you shop around. If it's unclear what a lender allows, don't be afraid to ask what the cap is before you apply. 

Credit, debt-to-income ratio (DTI), and reserves may matter more

Any time you apply for a mortgage, HELOC or otherwise, a lender will want to measure risk. To do so, they’ll take a look at:

• Your credit 

• Debt-to-income (DTI) ratio

• Savings 

To get a HELOC on an investment property, you may need to have stronger credit, a wider gap between your monthly income and debt payments, and substantially more in savings. 

Again, this all goes back to how a lender handles risk. Lenders may feel more comfortable giving you a HELOC if you have good to excellent credit, little debt other than your primary mortgage, and a nice chunk of change in the bank. All of those factors help to reduce your overall risk profile.

Rates, fees, and terms may differ

Investment property HELOCs could have higher interest rates and fees than a primary residence HELOC. The terms may also be less flexible. The lender you work with will use several factors to determine what you pay for a HELOC, including:

• The lender you work with

• Your credit profile

• Income

• Debt

• Equity

HELOC repayment has two phases: a draw period and a repayment period. In the draw period, which is typically the first five to 10 years, you might make interest-only payment payments. Once the draw period ends, you pay back the principal amount you borrowed, plus interest so the monthly payment is higher. 

Most HELOCs have a variable interest rate. This rate is tied to a benchmark rate, which can go up or down over time. If the benchmark rate changes, your HELOC rate could follow suit. If the rate goes up, your monthly payment could go up. A fixed-rate HELOC can offer more predictability if you don't want to worry about changing payments. 

How rental income may be reviewed

Your lender may ask for information about the rental income from your investment property. You may need to share copies of lease agreements you have with tenants, tax returns, and a rent roll, which is a detailed breakdown of how much rental income the property brings in and who lives there. 

Lenders don’t always ask for this information but it's smart to have updated records on hand in case yours does. If a lender requests information about your rental income, they may use it to calculate your DTI. That could work in your favor if added rental income reduces your debt-to-income ratio, but lenders may use conservative calculations to do the math. 

Where to look for a HELOC for an investment property

You might look for a HELOC on an investment property with local and regional banks, credit unions, or with specialized lenders that work with investors. Your current bank may be your first stop, but be prepared to talk to more than one lender before you find the right one to work with. 

When you chat with a lender about getting an investment property HELOC, it might help to have a script to follow. Here are some helpful questions to ask:

• Do you offer HELOCs on non-owner occupied properties? 

• What's the max CLTV allowed, and how do you calculate it?

• What property types are allowed? For example, do you lend for single-family rentals, multi-unit properties, or condos?

• Can you lend to me if I own a multi-unit home and live in one of the units?

• What documentation is needed to prove rental income?

• What's the draw period for a HELOC and is there a minimum draw?

• When does the repayment period begin, and is the rate fixed or variable?

• What fees will I pay? For example, do you charge an annual fee or a prepayment penalty?

• Is an in-person appraisal required?

• Are there any restrictions on how the property can be titled? For example, do you lend to individuals or will I need to establish a limited liability company (LLC)?

• Can you offer HELOCs on investment properties in my state? 

This list might seem like a lot but it can help you get the clearest picture possible of whether a lender is right for you. At a minimum, it's helpful to get HELOC quotes from at least three lenders and compare the terms side-by-side before you make a final decision. 

What banks offer HELOC on investment property?

Every bank is different when it comes to HELOCs and which types of property qualify. A local community bank or regional bank may offer more options than you might expect, while big banks may limit HELOCs to primary residences only. Geography and economic conditions can affect what's available at any given time. 

You may want to compare a mix of big and smaller banks that offer investment property HELOCs to figure out which one might be better for your needs. Don't forget about credit unions either, since they may sometimes offer lower rates than their competitors. You'll need to join a credit union to apply for a HELOC, but some credit unions offer membership to everyone. 

How to apply for a HELOC on an investment property

The process to apply for a HELOC is fairly straightforward. You'll need to estimate your equity, gather your documentation, and submit your paperwork. Here's what you can expect.

1. Estimate equity. To find your equity, subtract your current mortgage balance from your investment property's current value. You can get an estimated value from a site like Zillow or Redfin. 

2. Gather your documents. Organizing your documents can save time in the application process. We've included a document checklist to follow below. 

3. Shop offers. If you haven't chosen a lender yet, shop around. Compare rates and terms from at least three lenders to find out which one has the best deal.

4. Apply. Once you choose a lender, you'll submit an application and copies of all requested documents. The next step is usually an appraisal, which the lender will schedule. Once the appraisal is done, the lender finishes underwriting so you can move to closing.

5. Close. If you're approved for an investment property HELOC, you'll need to sign the closing documents and pay closing costs. Your lender will also tell you how you'll be able to access your HELOC (e.g., bank account, credit card, debit card, etc.)

6. Plan repayment. Your loan agreement should outline the terms of your draw period and repayment period. You can sit down with your budget to estimate where monthly HELOC payments fit in.

Investment property HELOC document checklist:

• Recent pay stubs

• Bank statements

• Tax returns

• Mortgage statements

• Proof of property insurance

• Copies of leases

• Rent roll

If you're self-employed, you may also need an updated cash flow statement and profit-and-loss statement to share with the lender. 

HELOC vs. home equity loan vs. cash-out refinance for a rental property

A HELOC is a revolving line of credit that's secured by your home. Home equity loans let you borrow a lump sum of cash, using your home as collateral. Both a HELOC and home equity loan are second mortgages, which means you pay them off alongside the primary mortgage you used to buy the property.

A cash-out refinance replaces your current mortgage with a new one and allows you to withdraw your equity in cash when you close. You still have just one mortgage pay, but it's for a larger amount. 

All three let you get cash from your equity for home improvements, debt consolidation, or other goals. HELOCs typically have variable rates while a home equity loan is more likely to be fixed-rate. A cash-out refi loan rate could be variable or fixed. All three carry closing costs and all three are secured by your home. 

Unsure which one you should choose? Learn more with our helpful guides:

• How does a HELOC work?

• HELOC vs. home equity loan

• Home equity loan vs. cash-out refinance

As you compare all three, think about what you value most. For example, if you want payment predictability, then focus on getting a fixed rate. If you want to keep your existing mortgage intact, opt for a HELOC or home equity loan. If you want a single monthly payment, consider a cash-out refinance. If you need the flexibility to borrow, repay, and borrow more, look at a HELOC. A home equity loan is an option if you want a one-time loan.