One of the perks of investing in rental property is the fact that it offers you a wide range of options when it comes to investment loans. Unlike other types of assets, acquiring an investment property is possible with little to no down payment. Needless to say, this will enable you to finance fairly sizable real estate investments and scale your returns with ease. One particular financing tool that very few people are aware of is HELOC. In fact, this alternative method can be used effectively on investment properties. So what is a HELOC on investment property? And how to qualify for a HELOC on investment property? This article will cover everything you need to know about HELOC and walk you through the process of obtaining one for a real estate deal.
Related: Can Anyone Get a Loan for Rental Property? What Does It Take?
What Is a HELOC?
Before discussing the details of HELOC on investment property, we should first provide you with a definition of this concept. HELOC stands for «home equity line of credit» and it refers to a form of credit that allows you to leverage the equity in real estate. The collateral in this type of lending is the difference between the mortgage balance and the value of your investment property.
Here are some of the benefits of HELOC:
- It allows you to tap into your home equity without selling the property.
- It enables you to consolidate higher-interest debt.
- HELOC provides you with extra funds that you can use to invest in non-owner occupied vacation homes or other types of property.
HELOC doesn’t come without cons though. The main risk of such loans is the possibility of spending the funds in a wasteful manner and having to pay it back with interest.
How HELOCs Work
Generally speaking, these loans unfold in two phases: a draw period and a repayment period. During the initial phase of the loan, the lender grants you unlimited access to your funds for a period of 10 years. Throughout the draw period, mortgage lenders merely require small interest payments from the borrower. After this phase concludes, the HELOC enters the repayment period. At this point, you will no longer have access to any funds and you will be expected to repay the debt over a 20-year period and at a variable rate. It is also worth noting that HELOCs tend to have lower closing costs than other loans.
Getting a HELOC on Investment Property in 2020
Like we stated earlier, a HELOC gives you access to additional funds that you can use in a wide array of ways. A savvy real estate investor can put their equity to work for them and use it to finance other successful real estate investments. Besides buying another income property, there is also the option of renovating your primary residence. Moreover, a HELOC on investment property can improve your credit score when you start making your payments. In any event, here is how you can get a HELOC on investment property in 2020.
1- Make sure to check your credit score
The first step of applying for any investment loan is checking your credit score. In fact, this is the first thing that lenders look at when screening potential borrowers. The criteria differ from one lender to another, but generally speaking, a credit score of 740 tends to be the ideal figure for most banks that offer HELOC on investment property.
Related: What Is a Good Credit Score? Everything Real Estate Investors Should Know
2- Prepare your application
After making sure that you meet the minimum credit score requirements, you should start preparing your HELOC on investment property application. At this stage, you need to get organized and get all the paperwork in order. This includes crucial information such as your social security number, your income and employment history, and financial details pertaining to your home. As for the process of filling out the application, most banks provide you with access to an online platform designed specifically for this purpose.
3- Verify your income
When your HELOC on investment property application is received, the lender will take steps towards verifying your income. You will be required to provide several documents such as pay stubs and W-2. Additionally, you will have to account for any other source of extra income. This includes rental income from a rental property, alimony, or a pension.
4- Wait for the decision
After the verification of your income, an initial decision will be made after 3 business days. At this point, the lender will go over every aspect of the application and assess your credit relative to your current income. This calculation is the debt to income ratio. Ideally, your ratio should at least be in the 40 to 50 percent range.
5- Go through the appraisal and close the loan
If the lender approves your HELOC on investment property application, the next step will be an appraisal of your home. This is a simple process that seeks to assess the true value of your equity. After the appraisal, the bank will schedule a closing date on which you will sign the loan agreement.
Related: All You Need to Know About House Appraisal and Its Benefits
A Few Points to Keep in Mind When Applying for a HELOC on Investment Property
As it is the case with any form of real estate investment financing, getting a good HELOC deal is predicated on having a firm grasp of how the market works. It is essential to shop around before committing to anything as rates and fees can vary widely from one lender to the other. Furthermore, some of the fees that come with a HELOC on rental property can be flexible. Make sure to negotiate for lower loan-origination fees when you are closing the deal.
The Bottom Line
Getting a HELOC on investment property is without a doubt the simplest and most effective way to capitalize on the equity that you have accumulated over the years. As long as you direct the funds towards profitable real estate ventures, a HELOC can be your first step to expanding your portfolio and building your wealth. If you are looking for the right property to buy with a HELOC, you can use the Property Finder to check some potential investment properties in your area!
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.