Looking to improve your rental, expand your portfolio, or cover unexpected expenses? Leveraging rental property equity with a HELOC can be a smart move. But can you get a HELOC on a rental?
The answer is yes—obtaining a home equity line of credit (HELOC) on a rental property is possible. However, the requirements and process differ from those for a primary residence.
In this article, we’ll discuss how a HELOC works for rental properties, the benefits of leveraging rental property equity, and what you’ll need to qualify.
There’s more than one way to leverage your investment property
Investment properties can go beyond generating passive income through monthly rents.
Leveraging that rental property can mean using its equity—essentially, the difference between its market value and the outstanding mortgage balance—as collateral to secure funding.
This allows property owners to unlock the value of their investment without selling the asset.
- For example, if your rental property is worth $500,000 and you owe $150,000 on the mortgage, you have $350,000 in equity.
With a HELOC, you’re borrowing against a portion of that equity to fund the project you need to complete.
Can you get a HELOC on a rental property?
Yes, it is possible to get a HELOC on a rental property, though the requirements are stricter than for a primary residence.
Lenders view rental properties as higher-risk investments because they rely on rental income, which can fluctuate due to vacancies or market changes.
To offset this risk, lenders typically impose higher credit score thresholds, stricter loan-to-value (LTV) limits, and more comprehensive documentation requirements.
How does a rental property HELOC work?
A rental property HELOC operates similarly to one for a primary residence.
- It’s a revolving line of credit that allows you to withdraw funds as needed during a draw period—typically 5 to 10 years.
- You pay interest only on the amount you borrow, not the full credit limit.
- After the draw period, you’ll enter the repayment phase, during which you’ll pay back the principal and interest over a set term.
The eligibility criteria and terms are the primary differences, as shown below.
Requirements for a HELOC on a rental property
To qualify for a HELOC on a rental property, you’ll need to meet specific requirements set by lenders. These requirements often include the following.
Sufficient equity
After accounting for the HELOC, lenders typically want to see that you maintain at least 20% to 25% equity in the property.
This means your combined loan-to-value (CLTV) ratio—including your existing mortgage and the HELOC—cannot exceed 75% to 80% of the property’s value.
- Example: if your rental property is worth $500,000 and you owe $325,000 on your mortgage, you may be able to borrow up to $50,000 through a HELOC ($500,000 × 75% = $375,000; $375,000 – $325,000 = $50,000).
High credit score
Rental property HELOCs often require a credit score of 720 or higher. A strong credit score demonstrates to lenders that you are financially responsible, which is especially important given the higher risks associated with rental properties.
Solid debt-to-income ratio
Another key factor is your debt-to-income ratio (DTI). Most lenders prefer a DTI below 43%, though this threshold may vary. Your rental income will be factored into this calculation, so providing clear documentation is crucial.
Comprehensive documentation
Because rental properties are considered higher-risk, lenders may require more documentation than a primary residence HELOC.
- Recent tax returns
- Proof of rental income (e.g., signed lease agreements)
- Mortgage and insurance documents for the rental property
- An appraisal for determining the property’s current value
Benefits of leveraging rental property equity
Leveraging your rental property with a HELOC offers several advantages for property owners and investors:
- Increase property value: Use HELOC funds to make renovations or upgrades, which will increase the property’s market value and rental income potential.
- Portfolio expansion: Tap into your property’s equity to fund the down payment on additional investments, enabling you to grow your portfolio.
- Flexible borrowing: A HELOC provides access to funds as needed, making it a versatile solution for unpredictable expenses or phased projects.
- Tax advantages: If HELOC funds are used for qualified property improvements, the interest paid may be tax-deductible (consult a tax professional for specifics).
- Preserve cash flow: A HELOC allows you to access significant funds without depleting your savings or liquidating other assets.
Challenges of getting a HELOC on a rental property
While a rental property HELOC has many benefits, it’s important to consider the potential challenges:
- Higher interest rates: Lenders often charge higher rates for rental property HELOCs due to the increased risk.
- Strict approval requirements: Meeting the credit score, equity, and documentation standards can be more challenging for rental property owners.
- Shorter draw periods: Some lenders offer shorter draw and repayment periods for rental property HELOCs, reducing flexibility.
- Additional fees: Appraisal, origination, and closing costs may be higher than HELOCs for primary residences.
How HomeEQ simplifies HELOCs
While many lenders impose significant hurdles for rental property HELOCs, HomeEQ offers a borrower-friendly solution for accessing home equity.
Here’s what sets HomeEQ apart:
- Fully digital process: HomeEQ’s online platform allows you to apply 24/7, eliminating the need for in-person meetings or extensive paperwork.
- No loan officers required: Enjoy a streamlined process that puts you in control of your application from start to finish.
- Soft credit checks: HomeEQ’s use of soft pulls allows you to explore your options without impacting your credit score.
- Fast funding: Successful applicants can receive their funds by the end of the application process.
While HomeEQ primarily focuses on HELOCs for primary residences, its digital tools and borrower-centric approach make it a great option for homeowners exploring their equity options.
Leveraging a rental property: The bottom line
Leveraging rental property equity through a HELOC is an effective way to fund renovations, grow your portfolio, or cover unexpected expenses.
While qualifying for a HELOC on a rental property requires stricter criteria, the benefits—such as flexible borrowing, tax advantages, and increased property value—can make it a worthwhile endeavor for property investors.
With its fast, fully digital application process and borrower-first approach, HomeEQ makes accessing home equity easier.
Apply with HomeEQ today to leverage that equity to its full potential!
