A home equity loan allows you to borrow money against the value built up in your home. While most people seek out these loans using their primary residence, it is possible to get a home equity loan on a rental property – it just tends to be harder and more expensive.
In this article, we’ll go through the information you need to make an informed decision before taking out a home equity loan on a rental property. We’ll cover the potential benefits, risks and long-term implications of such a financial move, and common questions you may have.
Renting out real estate can be a great way to generate passive income and build long-term wealth. However, sometimes investors need to access the equity in their rental properties to pull out cash for other investments, expenses, or opportunities. While most banks allow you to take out home equity loans or lines of credit (HELOCs) on primary residences, it can be trickier qualifying for these products on investment properties.
In this comprehensive guide, we’ll discuss how home equity loans work on rentals, what banks offer them, eligibility and approval criteria, alternatives to explore, and tips for getting approved. Read on to learn everything you need to know about leveraging the equity in your rental properties with a cash-out home equity loan.
What Are Home Equity Loans and How Do They Work on Rental Properties?
A home equity loan lets you borrow money against the equity in your home or rental property. Equity is the current market value of the property minus any outstanding mortgage balances owed on it
With a home equity loan, you receive the full loan amount upfront as a lump-sum payment. The loan has a fixed interest rate and a set repayment term, usually between 5 and 30 years. You pay back the loan plus interest in fixed monthly installments over the life of the loan
Home equity loans allow you to tap into your rental property’s equity and convert it to cash you can use for any purpose. Common uses for rental property home equity loan proceeds include:
- Funding repairs or renovations
- Purchasing an additional investment property
- Starting a business
- Consolidating higher-interest debt
- Covering unexpected expenses
- Accessing cash for investments or other opportunities
While most lenders let you take out a home equity loan against your primary home, it can be more challenging getting approved for one secured by a rental or investment property.
Can You Get a Home Equity Loan for a Rental Property?
Yes, it is possible to get a home equity loan on a rental property or other investment real estate. However, you’ll have a harder time qualifying than if you were borrowing against your primary residence.
Lenders view loans on rentals as riskier because:
- You don’t live in the home or rely on it for shelter
- If you default, you’re less likely to go through the effort of saving the property
- Rental income fluctuates more than salaried wages
For these reasons, fewer banks offer home equity loans for investment properties. Those that do have stricter eligibility requirements, including:
- Higher credit score minimums
- Lower maximum loan-to-value (LTV) ratios
- Larger required income and asset reserves
You’ll also likely get a higher interest rate than primary residence home equity loan rates. However, if you have a strong application and extensive assets, you may still be able to qualify.
Banks That Offer Home Equity Loans on Rental Properties
While most big banks shy away from rental property home equity loans, some niche and online lenders are more open to them. Here are some of the top banks to consider if you need cash out of an investment property:
Wells Fargo – Wells Fargo offers home equity loans and lines (HELOCs) on rentals and second homes. Their eligibility requirements are stringent, including a 720 FICO credit score minimum for the best rates.
Citibank – Citibank accepts rental properties to back home equity loans and HELOCs. They have flexible limits up to $500,000, but may require a large initial draw.
HSBC – HSBC is open to home equity lending on rentals if you have strong income, credit, and assets. Loan amounts go up to $750,000 with a 720 FICO score.
TD Bank – TD Bank may approve home equity loans on rentals with 720+ credit scores, 50% LTV or less, and substantial reserves.
First Tech Federal Credit Union – First Tech FCU offers HELOCs on investment real estate in amounts up to $500,000 with strong applicant finances.
NASA Federal Credit Union – NASA FCU provides HELOCs on rental properties for those with existing membership and eligible employer affiliations.
PNC – PNC caps home equity loans on rentals at $750,000 or 80% LTV for well-qualified borrowers with 740+ FICO scores.
Santander – Santander could be an option but limits LTV to 65% and requires excellent credit and income documentation.
Talk to loan officers at multiple banks to compare options and find the most competitive home equity loan rates and terms.
What Are the Requirements to Qualify for a Rental Property Home Equity Loan?
To qualify for a home equity loan on a rental property, you’ll generally need:
- Credit score – 720 FICO or higher
- Debt-to-income ratio – Below 50% total monthly debt payments to gross income
- Loan-to-value ratio – Up to 80% LTV, but sometimes lower
- Cash reserves – Some lenders want up to 18 months of reserves
- Property appraisal – Investment properties require a professional appraisal
In addition:
- Your rental income must exceed expenses by 25% or more
- You may need existing accounts or membership with the lender
- Some banks limit the number of financed investment properties you can have
Come with substantial assets, strong credit, and plenty of free cash flow, and you’ll have the best shot at securing a competitive home equity loan rate and amount on your rental property.
7 Tips for Getting Approved for a Home Equity Loan on a Rental Property
If you want the green light for a rental property home equity loan, do everything you can to appear as an ultra low-risk borrower. Tips to boost your chances include:
1. Shop lenders that specialize in this niche – Find lenders accustomed to evaluating loan applications for investment properties rather than just primary residences.
2. Get quotes from multiple banks – Apply with several lenders to compare rates and terms and leverage offers against each other.
3. Pay down debts to lower your DTI – The lower your total monthly debt obligations relative to income, the better. Pay off credit cards and other debts to optimize this key ratio.
4. Increase your down payment amount – Put down 20% to 30% or more on the property purchase to build equity faster.
5. Boost your credit score – Shoot for at least a 720 FICO to qualify for the top rates and terms.
6. Pad your savings account – Bulk up on reserves to reassure lenders you can cover periods of rental vacancies.
7. Highlight consistent rental demand – Provide paperwork proving long-term tenants and few gaps between leases.
The stronger your overall financial profile, the better position you’ll be in to secure capital against your rental property holdings.
Alternatives if You Can’t Get Approved for a Rental Home Equity Loan
If you get denied for a cash-out home equity loan on your rental, you have a few other options to tap into your investment property’s equity:
Home Equity Line of Credit (HELOC) – HELOCs have variable interest rates but may have lower standards for investment properties.
Primary Mortgage Refinance – A cash-out refinance converts equity in your primary home to cash you can invest.
Private Lender – Hard money and private lenders offer loans based more on property value than your finances.
Unsecured Personal Loan – A personal loan doesn’t use real estate as collateral but can provide funds for investment.
Sell the Property – List your rental property for sale, pocket the equity, and scale back your holdings.
Explore multiple avenues to access your rental property equity in the optimal way based on your current situation and strategic investment goals.
Wrap Up
While most lenders shy away from offering home equity loans for investment properties, some niche banks like Wells Fargo, Citibank, First Tech FCU, and others may provide them if you are a well-qualified borrower. Come armed with an excellent credit score, healthy income and reserves, and a substantial down payment on the property.
Shop multiple lenders to compare rental property home equity loan rates and terms. And utilize these specialized products strategically as part of your overall investment strategy. With the right prep work and research, tapping equity on your rental properties can provide critical capital to expand your real estate holdings and long-term wealth.
Pros of Home Equity Loans on a Rental Property
- Access to cash: Home equity loans provide rental property owners with cash for various purposes, such as property improvements, expanding their real estate portfolio or handling unexpected expenses.
- Lower interest rates compared to some other options: These loans often come with lower interest rates compared to unsecured personal loans or credit cards, potentially saving you money on interest payments over time.
- Potential tax deductions: The interest paid on a home equity loan for a rental property may be tax-deductible, reducing your overall tax liability and making it a financially efficient option.
- Possible improved property value: Using the loan to invest in property upgrades may increase your rental property’s value, potentially leading to higher rental income and property appreciation.
- Flexible use: Home equity loan funds are versatile and can be used for a wide range of purposes, providing flexibility in making strategic financial decisions for your rental property investments.
How To Get a Home Equity Loan on a Rental Property
Obtaining a home equity loan on a rental property can be a strategic financial move for investors looking to leverage their real estate assets. This section will outline the steps and considerations in securing a home equity loan on a rental property and help you navigate the process effectively.
Not all lenders offer home equity loans on rental properties, and those who do may have stricter requirements compared to loans on primary residences. Home equity loans on rental properties also often have higher interest rates than those for primary residences, reflecting the lender’s increased risk due to the property being an income-generating asset.
Qualifying for a home equity loan on a rental property typically involves meeting certain eligibility criteria set by lenders. These criteria often include a minimum credit score.
Lenders also consider the loan-to-value ratio (LTV), which is the ratio of the loan amount to the property’s appraised value. While lenders often require an LTV ratio below 80% for home equity loans on primary homes, this is often lowered to 70% for rental property home equity loans. This means you likely will need to have at least 30% equity in the property to be eligible.
Additionally, lenders may assess the condition and marketability of the rental property, as they want to ensure that the property is in good shape and has the potential to generate rental income.
>> Related: Learn more about home equity loan requirements
Applying for a home equity loan on a rental property involves several steps. Below is a general step-by-step guide to help you through the application process:
- Research lenders: Start by researching and comparing lenders that offer home equity loans on rental properties. Look for favorable terms and requirements that align with your financial situation.
- Get pre-qualified: Contact your chosen lender for pre-qualification. During this stage, the lender will assess your eligibility based on factors like credit score, income and the property’s value. This pre-qualification step gives you an idea of how much you may be able to borrow.
- Gather documentation: Prepare the necessary documentation, which typically includes:
- Proof of identity, such as a driver’s license or passport.
- Proof of income, such as tax returns, W-2 forms or rental income statements.
- Property-related documents, such as the deed and recent appraisal.
- Information about your existing mortgage, if applicable.
- Submit application: Complete the lender’s application form, providing accurate and detailed information about yourself and the rental property. Be prepared to disclose your financial history, including debts and assets.
- Complete property appraisal: The lender will usually order an appraisal of the rental property to determine its current market value. This step helps establish the property’s equity and the maximum loan amount you can qualify for.
- Go through underwriting and approval: Once your application is submitted and all required documentation is provided, the lender’s underwriting team will review your application, assess your creditworthiness and verify the property’s value. If everything meets their criteria, they’ll likely approve your loan.
HELOCs for Rental Property Are BACK (Use Your Equity!)
FAQ
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