The Physician’s Guide to Getting a HELOC on an Investment Property

The home equity line of credit (HELOC) is one of many ways medical professionals can finance their homeownership aspirations.

These credit lines give you access to cash in exchange for putting up your home’s equity as collateral.

Residential properties (i.e., those where the line of credit applicant lives) commonly feature in HELOC applications.

However, real estate investors have been increasingly using HELOCs for investment purposes.

This article explains everything you need to know about getting a HELOC on an investment property.

We reveal whether it’s possible, what the process entails, and more.

Key Takeaways

A HELOC on an investment property is possible but has stricter lending requirements.
Lenders require high credit scores, low debt-to-income ratios, and strong equity stakes.
HELOCs offer flexible financing, but rates, fees, and foreclosure risks are higher.
Alternative funding options include cash-out refinancing, personal loans, and business credit.

Table of Contents

Is a HELOC On An Investment Property Possible?

Yes, you can get a HELOC on an investment property. Many real estate investors use a home equity line of credit to improve an existing investment property. In some cases, they take a home equity loan to fund a rental property purchase.

However, these credit lines don’t come easy because HELOC lenders tend to view investment properties as riskier bets than the average primary property.

They believe that real estate investors have less to lose if the HELOC loan they’re taking isn’t for a property that provides a roof over their heads.

Thus, most lenders have stringent criteria borrowers must meet before using an investment property’s equity as collateral.

Also, HELOC interest rates for an investment property tend to be higher than a primary residence.

How Investment Property HELOCs Work

An investment property HELOC works the same way as a residential one.

A successful application grants access to a credit line that’s equivalent to your property’s equity value (much like a credit card’s credit limit).

You can draw on the credit during the draw period without worrying about paying back the amounts you borrow.

Once the draw period ends, you begin paying down the outstanding balance and whatever unpaid interest remains.

Failure to pay your debt puts your property at risk of foreclosure.

Qualification Criteria

As mentioned, you must meet stringent qualification criteria before getting an investment property HELOC.

Lenders look for the following qualities before granting a HELOC application for an investment property:

Credit Score: Unsurprisingly, HELOC lenders prefer lending to individuals with decent credit scores. While the number varies from one company to the next, your application should get a favorable response if your credit score ranges between 700 and 720.
Debt-to-Income Maximum: While it’s alright to have debt when applying for a HELOC, the less debt you have versus your monthly take-home the better. Lenders will use your debt-to-income ratio to determine whether you can take on additional debt, and it mustn’t exceed 50%.
Property Appraisal: Expect your lender to conduct multiple in-person appraisals exclusively. Lenders do this to gauge property values before extending a home equity loan. Virtual showings are more common when HELOC funds are sought to finance a personal property.
Minimum Equity Stake: The minimum stake you can offer in your investment property’s equity is 20%. Lenders arrive at the figure by subtracting the property’s mortgage debt from its current value.
Loan-to-Value Ratio Maximum: Your investment property’s loan-to-value ratio represents the difference between the property’s appraisal value and the amount you seek to borrow. It mustn’t exceed 80%.
Cash Reserves: Lenders expect you to have cash reserves to cover at least six months of monthly payments.

Here’s how the above eligibility requirements compare to a HELOC for a primary home:

Requirement	HELOC for Investment Property	HELOC for Primary Residence
Credit Score	700-720	650-680
Debt-to-Income Maximum	50%	43%
Property Appraisal	In-person, multiple times	In-person or virtual
Minimum Equity Stake	20%	15%
Loan-to-Value Ratio Maximum	75-80%	85-90%
Cash Reserves	Must cover monthly payments for a minimum of six months	May not be a requirement

Aside from the above, you must also provide employment and income documentation that proves your ability to repay the HELOC.

Tax Benefits Associated With HELOCs

HELOCs offer tax advantages, mainly in the sense that using the funds to improve the property makes HELOC interest tax deductible.

Remodeling, building an additional wing, and associated repairs are use cases that can count toward interest deductions.

We recommend consulting a tax professional to learn more about how you can stay on the right side of tax law while using this benefit.

Pros and Cons of Getting a HELOC on Your Investment Property

Having established that it’s possible to get a HELOC on your investment property, is it the right choice to get one?

Here are the pros and cons of using this financial lifeline:

Pros

Reduced Risk: Getting a HELOC on an investment property isn’t as risky as getting one for your primary residence. The reason is that the property that will be foreclosed if you default on repayment won’t be the one you live in.
Cash On Demand: The HELOC gives you access to money on demand during the draw period. This flexibility lets you address any expenses related to your investment property as and when they come up.
Low Initial Payments: When you get a HELOC, you don’t have to repay the principal until after the draw period. Your repayment gets limited to the interest that accrues on your withdrawals. This arrangement lets you focus on developing the investment property’s value and keeping your overheads down.
Lower Interest Rate: A HELOC offers a lower interest rate than a personal loan or credit card.

Cons

Limited Lenders: There aren’t many lenders who offer HELOCs for investment properties. Your limited borrowing options could mean getting tied to the few lenders who do.
Higher Rates: Since lenders view investment property HELOCs as riskier than their primary resident counterparts, their rates and fees tend to be higher.
More Fees: These HELOCs have multiple fees that make them expensive for property investors. Two examples include the annual and early cancellation fees.
Risk of Negative Equity: An investment property HELOC can be a gamble because there’s no guarantee that your investment property’s value will appreciate. In the worst-case scenario, you could end up owing more than your property is worth.

Alternative Sources of Funding for an Investment Property

If your financial situation precludes you from getting a HELOC for your investment property, try one of these alternatives:

Personal Property HELOC

Let’s say you can’t find a lender who’s willing to grant you an investment property HELOC. In that case, you could get one for your primary residence.

However, remember that this alternative means putting your home on the line and losing out on the deductible interest tax benefit afforded to investment properties.

Cash-Out Refinance

Cash-out refinancing involves refinancing the original mortgage on your investment property for a larger amount.

Using this method gives you access to extra cash due to leftover money from the new principal.

Personal Loan

If you don’t have too much debt and your credit score isn’t too low, you could try taking a personal loan instead. It’ll give you access to a lump sum once you qualify.

This can be an excellent alternative if you don’t mind paying back the loan immediately after it’s disbursed.

Small Business Line of Credit

This alternative is excellent for investors who’ve set up companies.

Like an investment property HELOC, it includes a higher interest rate. However, unlike HELOCs, you don’t get a payment-free (i.e., interest-only) draw period.

The above alternatives should give you access to the capital needed to develop your investment property and reap future rewards.

Also, except a primary residence HELOC, you don’t need to put up your property’s equity as collateral.

Four Steps to Getting a HELOC for an Investment Property

Follow these steps to give your investment property HELOC plans the best chance of success:

Step One – Check Whether You Qualify

Start by checking whether you meet the qualification criteria required for getting a HELOC on investment property.

This step entails checking the equity you have in the property, determining your debt-to-income ratio, gathering your documentation, and ensuring you have good credit.

You must also determine whether you have the budget required for the HELOC.

In addition to interest payments, you’ll pay closing costs and other fees.

Step Two – Compare HELOC Company Offerings

Do your research on companies that offer HELOCs on investment properties and compare their offers to get the best deal.

Aside from factors like fixed and variable interest rates and fees, you’ll need to consider:

Each HELOC’s draw period length (including whether interest-only payments are possible during the period);
The HELOC provider’s annual percentage rates; and
Prepayment penalties

While there aren’t many companies that offer investment HELOCs, it’s worth noting that shopping around could affect your credit score (due to hard inquiries).

You can mitigate the effects by applying to all companies of interest within 14 days.

Step Three – Apply

Once you find a lender that meets your needs, apply for a HELOC with them.

Ensure you’re all set regarding documentation and qualification criteria.

Some of the documents you must provide include your:

Legal name, date of birth, and address
Social Security number and government-issued photo ID
Current employer’s name and address
Proof of personal income (e.g., recent pay stubs, bank statements, income tax returns)
Investment income documents

Although no two lenders operate on the same schedule, providing all the information you’re asked to could help speed up the vetting process.

Step Four – Seal the Deal

If your application gets approved, you can close on the HELOC. Closing entails signing the paperwork and paying a closing fee.

In some cases, the closing process can happen within a few working days, after which you’ll have access to the credit line.

Once you get the cash, you can direct it toward your investment property project while sticking to your HELOC’s terms.

Frequently Asked Questions

What Is the Maximum HELOC Amount?

HELOC lenders let you borrow up to 80% of your property’s value minus the principal owed. However, you must show that you can repay the debt before you’re allowed access.

What Disqualifies You for a HELOC?

Low equity, a terrible credit score, and a bad loan-to-value ratio will make it difficult to get a primary residence HELOC, let alone one for an investment property.

Which Is Better for Real Estate? A Home Equity Loan or a HELOC?

The answer depends on your personal strategy. If you want access to a line of credit you can draw from repeatedly, a HELOC is the right choice.

Additionally, when you take out a HELOC, you don’t have to pay interest on money you don’t use.

Meanwhile, a home equity loan requires repayment of the balance and interest regardless of whether you used the money.

Final Thoughts On HELOCs for Investment Properties

While investment property HELOCs aren’t a common option, there are still lenders who offer them.

If you meet the stringent qualification criteria set out for borrowers, you can gain access to a credit line and fund your project.