Can You Get a HELOC on a Rental Property?

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Updated: October 19, 2024

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A home equity line of credit (HELOC) is a popular option for homeowners looking to tap into their property's equity for flexible financing. While many associate HELOCs with primary residences, they can also be used on rental properties to leverage investment assets for cash.

However, getting a HELOC on a rental property differs from doing so on your home — it often comes with higher costs and stricter qualifications. We'll explore these distinctions and guide you in making informed decisions about using a HELOC on your rental property.

Key Takeaways

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You can get a HELOC on a rental property, but it requires stricter qualifications and has fewer lender options than primary residences.

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Unlike HELOCs on primary residences, those for rental properties require a credit score of 720+ and a lower loan-to-value ratio (70-80%).

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Alternatives to a HELOC on a rental property include a cash-out refinance and a home equity loan, which may offer different terms and rates.

HELOCs on a Rental Property vs. Your Primary Residence

Understanding the differences between a home equity line of credit (HELOC) on an investment or rental property and a primary residence is important because it affects costs, eligibility and risks. Knowing these distinctions can help you decide which option aligns with your financial goals. The comparison table below highlights the key differences between HELOCs for rental properties and those for primary homes.

Comparison Areas
Rental Property
Primary Residence

Interest Rates

Typically higher, reflecting the increased risk for lenders as the property is not owner-occupied. Rates can vary by 1-2% more than for primary homes.

Generally lower, as lenders consider primary residences less risky due to owner occupancy, resulting in more favorable interest rates.

Lender Availability

Limited, with fewer lenders offering HELOCs due to the higher perceived risk of non-owner-occupied properties. Finding a lender may require more research.

There is broad availability, as most lenders offer HELOCs on primary residences, seeing them as safer investments. It is also easier to find competitive rates and terms.

Foreclosure Risk

The property isn't your primary home, so there is a higher risk of foreclosure. It is also easier to abandon it when you're in financial trouble, so lenders are more cautious.

Lower foreclosure risk because you live in the home, making it less likely you’ll default. Lenders feel more secure in offering better terms.

HELOC Calculator
Discover borrowing capacity, interest rates, and make informed financial choices with confidence!
You may be eligible for a HELOC. Because you have an LTV at or below 85%, you may be approved for a home equity line of credit.
10 Years Payoff Scenario
$732/mo
Eligible to Borrow
$62,500
Loan-to-Value Ratio
80%
Note: Lenders set varying limits on the acceptable Loan-to-Value (LTV) ratio, depending on the property type (owner-occupied or investment). Typically, owner-occupied homes have a higher acceptable LTV, often capped at 85%.
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WHAT IS AN INVESTMENT PROPERTY?

An investment property is real estate purchased to generate income rather than for personal use. An investment property is a real estate purchased to generate income rather than for personal use. Lenders view these properties as riskier because borrowers are more likely to prioritize payments on their primary residence over an investment property when in financial trouble. As a result, a HELOC on an investment property is riskier for lenders.

This increased risk can lead to higher interest rates, stricter lending requirements and fewer financing options, including for HELOCs. Understanding these is crucial when considering borrowing against an investment property.

Eligibility Requirements

HELOC requirements for rental properties often mirror those for primary residences but with stricter criteria. Due to the perceived risk, lenders may demand higher credit scores, lower loan-to-value ratios and stronger financials. Here are the requirements to prepare for when applying for a HELOC on a rental property.

Here’s a list of HELOC requirements for rental properties:

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    Credit Score

    A minimum credit score of 720 is often required, compared to 680 for primary residences. Some lenders may demand even higher scores for approval.

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    Loan-to-Value (LTV) Ratio

    Lenders typically allow an LTV of 70-80%, meaning you must retain 20-30% equity after the HELOC, compared to 85-90% for primary homes.

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    Debt-to-Income (DTI) Ratio

    DTI should be below 43%, though some lenders may require it to be 40% or less for investment properties.

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    Cash Reserves

    You may need 6-12 months of cash reserves to cover expenses, ensuring you can manage payments even if the property is vacant.

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    Rental Income Documentation

    Lenders may require proof of consistent rental income and review lease agreements and income statements to assess financial stability.

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Debt-to-Income Ratio Calculator

Provide your income and recurring payments to calculate your DTI.

Monthly Income Before Taxes

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Recurring Monthly Debts

Enter all applicable payments to ensure accurate results.

$
$
$
$
$

Pros and Cons of HELOCs on a Rental Property

A HELOC on an investment property offers the benefit of leveraging equity for new investments, but it comes with higher interest rates and stricter terms. Knowing these HELOC pros and cons is essential to ensure you're fully prepared before applying. Here's a breakdown of the advantages and disadvantages to help you weigh your options.

Pros
Cons

Leverage Equity: Access equity for new investments, boosting potential returns and property portfolio growth.

Higher Interest Rates: Expect higher interest rates due to increased risk compared to primary residences.

Flexible Access to Funds: You can draw funds as needed during the draw period, perfect for ongoing or unpredictable expenses.

Stricter Qualification: More stringent requirements, including higher credit scores and lower LTV ratios, make qualifying challenging.

Potential Tax Benefits: Interest on funds used for property improvements may be tax-deductible, lowering taxable income.

Risk of Foreclosure: Defaulting could lead to losing your rental property, jeopardizing your investment and income.

No Immediate Repayment: Only pay interest during the draw period, easing cash flow management early on.

Limited Lender Availability: Fewer lenders offer HELOCs for rental properties, limiting your options and possibly increasing costs.

How to Get a HELOC on a Rental Property

Knowing how to get a HELOC on a rental property can help you secure financing more effectively, allowing you to leverage your investment wisely. Understanding the steps involved ensures you're prepared and can navigate the process smoothly. Below are the steps to guide you through obtaining a HELOC on your rental property.

  1. 1
    Assess Your Equity

    Calculate your property’s equity by subtracting your outstanding mortgage balance from its current market value. This equity will determine how much you can borrow.

  2. 2
    Check Your Credit Score

    Ensure your credit score meets or exceeds the minimum requirement, typically around 720, as lenders are stricter with rental properties.

  3. 3
    Gather Financial Documentation

    Prepare proof of income, tax returns and rental income records. Lenders need this to assess your financial stability and ability to repay.

  4. 4
    Shop for Lenders

    Research lenders that offer HELOCs on rental properties, comparing interest rates, fees and terms. Fewer lenders offer these products, so be thorough.

  5. 5
    Apply for the HELOC

    Submit your application with all required documentation. Be ready for a property appraisal, as the lender will need to verify its value before approving your HELOC.

Alternatives to HELOCs on a Rental Property

You might decide against a HELOC on investment property due to higher interest rates and stricter qualification requirements. It’s important to explore other financing options, as these might offer more favorable terms or better suit your financial situation. Below is a table outlining alternatives to a HELOC on a rental property, helping you find the best fit for your needs.

Alternative
What It Is
Who Should Consider It?

Cash-out Refinance

Refinance your mortgage for more than you owe, taking the difference as cash.

Those with significant equity looking for a lump sum at potentially lower rates.

HELOC on Primary Residence

A revolving line of credit using your primary home's equity as collateral.

Homeowners with available equity who want flexible access to funds without touching their rental property.

Home Equity Loan

A lump-sum loan using the equity in your property as collateral, with fixed interest rates.

Borrowers who prefer a fixed amount and steady payments over time, and who have substantial equity in their property.

Personal Loan

A loan not backed by collateral, offering quick access to cash.

Borrowers with strong credit who need a smaller amount quickly without using property as collateral.

Small Business Loan

A loan designed for business expenses, often with flexible terms.

Real estate investors who manage multiple properties under a business structure and need funds for business-related expenses.

FAQ: HELOCs on a Rental Property

When considering a HELOC on a rental property, homeowners may have questions about how it differs from securing one on a primary residence. We’ve gathered answers to commonly asked questions about this subject.

Is HELOC interest tax deductible on a rental property?
Can I use my HELOC funds for a down payment?
How can I find HELOC lenders for a rental property?
What are the current HELOC rates?
Can you use a HELOC for investment?

About Zachary Romeo, CBCA

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Zachary Romeo is a certified Commercial Banking and Credit Analyst (CBCA), and the Head of Loans and Banking at MoneyGeek. Previously, he led production teams for some of the largest online informational resources in higher education, with over 13 years of experience in editorial production.

Romeo has a bachelor's degree in biological engineering from Cornell University. He geeks out on minimizing personal debt and helping others do the same through people-first content.

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