Finding A Lender For An Investment Property Line Of Credit
Lenders who offer HELOCs on investment properties are hard to come by, so you may have to do a little digging to find one.
A potentially effective way to find home equity lenders is through word of mouth. Join local and regional real estate investing groups and ask for lender recommendations. You could also try searching for resources offered by online real estate communities.
One reason these types of lenders might be few and far between is due to the increased risk that an investment property line of credit brings. As an investor, if you face a financial hardship that reduces your income, its expected that youll almost always cover the mortgage payments for your main home first. Repaying a line of credit on a rental property likely isnt at the top of your list of priorities.
Additionally, if you happen to lose your rental property to foreclosure, the sale proceeds would pay off your first mortgage, then whatevers left would go toward repaying your HELOC.
Home Equity Sharing Vs Heloc/home Equity Loan Vs Reverse Mortgage
Two alternatives to home equity sharing are:
Traditional financing options like HELOCs and home equity loans are typically more favorable for homeowners than home equity sharing agreements.
Not only can you lock in a guaranteed interest rate with these loans, and thereby reduce your risk, the fees are typically a lot less.
As an example, Hometap charges 3% of your investment amount taken out of your initial proceeds as a closing fee. This is separate from the appreciation youll pay back if your home increases in value.
With interest rates still at historic lows, its possible to get a home equity line of credit in the range of 4% to 6% with very minimal fees.
The caveat is that the lending guidelines for these types of loans are strict. In most cases, qualifying means having at least an average credit score and sufficient cash flow to pay back the loan.
A reverse mortgage is a type of agreement that allows homeowners aged 62 years and older to borrow money upfront using their existing equity. Similar to home equity share agreements, no monthly payments are due.
The big difference is that the money borrowed via a reverse mortgage is a loan. That means interest and fees are added to the loan balance each month. The balance then grows the longer you keep the reverse mortgage agreement in place, and is paid back once you sell the home.
Best For Veterans: Veterans United Home Loans
Veterans United Home Loans
Why We Chose It: We chose Veterans United Home Loans as our best investment property lender for veterans because the firm specializes in VA-backed mortgages with experts who understand this loan program better than anyone else.
Offers 24/7 customer service over the phone
Has online application and pre-qualification
Employs advisors from each branch of the armed forces
Doesn’t offer home equity loans or HELOCs
Information on FHA, USDA, and conventional loans is harder to find on its website
Founded in 2002, Veterans United is a full-service lender that specializes in VA loans for qualifying veterans, active service members, and their spouses. They are one of the largest VA mortgage lenders in terms of volume in the United States.
Investors benefit from flexible qualification guidelines, lower rates, and monthly payments, no down payments, and no private mortgage insurance. Veterans United has VA loans for as little as 0% down, and they understand how to make the VA loan work for an investor and still remain within the programs guidelines.
Among the products offered are fixed and adjustable-rate mortgages, jumbo loans, refinance loans, and cash-out loans. Loan rates change dailyNovember 2021 rates ranged from 2.750% to 3.250%withAPRs between 3.049% and 3.558% depending on the loan product.
Estimate The Amount Of Your Heloc
Like all loans, when it comes to financing, each bank has different rules and regulations. Therefore their HELOC offering may look a bit different. Ultimately, lenders are going to allow you to borrow a specific percentage of the equity of your property. To estimate what that number would be all you need to do is take your appraised value/purchase price and subtract your loan balance.
Example: $525,000 – $410,000 = $115,000
From there you would multiple the percentage that they are willing to loan you on the equity of your home. This then becomes your second mortgage. I would suggest you speak to your loan officer/mortgage lender for a HELOC referral, as well as do a bit of research yourself. This way you do not limit your options and are able to maximize the size of your HELOC.
Risks Of Using Home Equity On A Rental Property
As with any financial product, there are some risks to consider when using a home equity loan or HELOC on an investment property.
- Primary residence acts as collateral. If you can no longer make payments on the home equity loan or HELOC, the lender will foreclose on the collateral property in order to fulfill your debt obligation. In this case, that is your primary residence.
- Closing costs & fees. You will have to pay closing costs and fees on your home equity loan or HELOC. While these arent typically as high as closing costs on mortgages, other loan optionssuch as personal loansoften dont have any fees.
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Is Heloc Interest Tax Deductible
Depending on how you use your HELOC, you might be able to deduct some of the interest on your taxes. In order to qualify for a tax deduction, however, the funds must be used on home improvements. You cant claim a tax deduction for HELOC funds used for other purposes, like debt consolidation or special events.
Best For Commercial Property: Lendio
Why We Chose It: We chose Lendio as our best for commercial property loans because their marketplace platform is the easiest way for an investor to fill out one application and receive offers from multiple competing lenders.
Wide variety of financing options and lenders
Personalized guidance and expertise to help you interpret your loan offers
High interest rates on some loans
You have to fill out their online application to see loan terms
Lendio is a free online service for investors where users receive potential commercial loan offers within minutes from the company’s marketplace of more than 75 lenders. Over 300,000 loans have been funded through Lendio, giving it a good reputation for success.
A marketplace like Lendio is great for commercial property investors because they can quickly and efficiently shop for the best terms. Unlike other commercial property options, they make the process simple with one application to shop rates.
Lendio lenders underwrite residential, multi-unit, and commercial real estate loans, as well as an array of business loans too. Down payments can be as low as 3.5% if you qualify for one of the agency loans, like FHA. Otherwise, traditional commercial property loan programs require 25% to 30% down.
Interest rates start at 4.25% on the Lendio platform for commercial property loans. Terms range from 20 to 25 years and take a minimum of 45 days to fund. Commercial property loan amounts range from $250,000 to $5 million.
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Downsides Of Getting A Heloc On An Investment Property
Exercise caution when getting a HELOC. If you pay late or miss a payment, your interest rate may skyrocket, putting your property at risk. Since youre putting up your property as collateral, you may be forced to sell or face foreclosure if you end up defaulting on the loan.
HELOCS on investment properties may also have variable interest rates, which are based on market rates and can get expensive.
Best For Poor Credit: Hometap
- Investments from $15,000 to $600,000
- Highest customer reviews of all companies listed
- No out-of-pocket costs
Founded in 2017, Hometap wants to make homeownership less stressful and more accessible. Hometap is our choice as the best for poor credit because of its ability to provide a financing solution to homeowners with credit scores as low as 500.
What you need to know
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Rocket Mortgage Llc: Nmls#3030
Min. Credit Score
Why we like it
Good for: borrowers who appreciate convenience online and on the go for a fully digital home loan experience with consistently acclaimed customer service.
Caters to self-service users who want to apply for a home loan online and talk to a human only as necessary.
Estimates the loan amount youâll qualify for within minutes.
Streamlines the online process with document and asset retrieval capabilities, including the ability to edit your preapproval letter.
Getting a customized interest rate requires a credit check, which can affect your credit score.
Doesn’t offer home equity loans or lines of credit.
Lender fees are on the high side and the fees aren’t offset by particularly low mortgage rates, according to the latest data.
Min. Credit Score
Good for: homeowners who are looking to refinance conventional, FHA or VA mortgages.
Offers the ability to securely upload and digitally sign loan documents.
Displays detailed sample rates for many of its refinance loan products.
Is Investing In Real Estate Risky
All investing is risky, but real estate investing carries its own risks. The property in which youve invested could decrease in value over time. If youre investing in property and renting it out, your property could be damaged by tenants or you could face long periods of nonpayment while you go through the expensive process of evicting someone.
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Benefits Of Rental Investing With A Heloc
Already eyeing a property or two? Unless youre independently wealthy and intend to buy your next property with cash, the next obvious step needs to be lining up a rental property loan to make the dream of property investing a reality.
The problem is that most rental property loans require at least 20-25% as a down payment. Which can add up quickly, when talking about assets costing hundreds of thousands of dollars.
The beauty of using a HELOC to cover the down payment is that its a rotating line of credit. You can draw on it to cover a down payment, funnel all your real estate cash flow into paying the balance off, then do it all over again.
Best Home Equity Sharing Companies: Final Thoughts
Home equity sharing companies enable home-equity-rich homeowners with bad credit or low incomes to get their hands on some of their homes value today, in the form of a lump sum payment, in exchange for giving up some of the homes future upside.
If you qualify for a traditional home equity loan or HELOC, its likely to be a better option long-term.
But for equity-rich homeowners who cant take on the monthly payments or dont qualify, home equity sharing agreements are a reasonable alternative.
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Calculating A Home Equity Line Of Credit
As per the Office of the Superintendent of Financial Institutions , a HELOC can give you access to no more than 65% of the value of your home. It’s also important to remember that your mortgage loan balance + your HELOC cannot equal more than 80% of your home’s value.
To see how this works, let’s look at an example:
The maximum amount of equity you could pull from your home through a HELOC is $105,000.
Now, you still need to make sure that $105,000 doesn’t exceed 65% of your home’s value. To be sure, simply divide the HELOC amount by the value of your home:
In this example, you could access $105,000 through a HELOC, which only amounts to 30% of your home’s value.
Alternatives To A Heloc On A Rental Property
If you find that a HELOC on your investment property isnt the best option for your financial goals, consider one of the following alternatives.
- Cash-out refinance. If youve built a significant amount of equity, you may benefit from a cash-out refinance. This type of refinance allows you to take out a new mortgage for more than what you currently owe. The new loan serves two purposes: paying off your existing investment property loan and pulling equity out of your rental property. The equity you tap is equal to the difference between the old and new loan amounts.
- Personal loan. You may qualify for a personal loan for as much as $100,000, and there are typically no restrictions on how the money is spent. The tradeoff is an interest rate thats higher than many mortgage products. Personal loans are unsecured, meaning your assets arent used as collateral.
- If you dont need a lot of money, a can be a solution. To minimize your interest costs, focus your search efforts on cards that have a 0% interest offer for a set amount of time after the account is opened.
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Best Credit Union: Penfed
As a credit union, PenFed has generous and easy-to-meet membership requirements, as well as perks for all members, including discounts, a financial hardship center where you can receive assistance online, and more. Additionally, it provides a higher HELOC in terms of loan to value, and rates starting at 3.75% AP. PenFed also allows borrowers to take out a line of credit of up to 90% combined loan to value a competitive rate, as the norm for most lenders is 85%.
PenFed covers your closing costs, as long as you dont pay off your line of credit within three yearsotherwise, youll have to repay them. Additionally, as long as you pay at least $99 in interest on your line of credit during the year, you wont pay an annual fee . The repayment period is up to 20 years following a 10-year draw period. HELOC amounts range from $25,000 to $500,000.
PenFed is a credit union that primarily serves U.S. military service members, their families, and veterans of all branches, but anyone can join if they become a member of one of PenFeds affinity partners, such as the Coast Guard Auxiliary Association , which may come with a small fee. A minimum deposit of $5 is also required to open a PenFed account.
Lets you borrow up to 90% CLTV
Ways to avoid fees
Penalty if paid off in three years
No application fee, closing costs, or annual fee on lines up to $500,000
Integration with Bank of Americas Preferred Rewards
What Are The Requirements To Get A Heloc For An Investment Property
Unlike traditional mortgages, HELOCs are not as heavily regulated, so banks have some liberty when it comes to setting interest rates and terms.
Nonetheless, to be eligible for a HELOC, you still need to meet a number of criteria. Individual banks will have varying guidelines that determine how much they can lend you, based on the property value and your credit. It pays to shop around for your HELOC, to see what kind of deal you can get.
Some of the key considerations that banks look at when issuing HELOCs for investment properties are as follows:
- A maximum combined loan-to-value ratio of 80%
- At least 15% equity in the property
- A credit score of 620 or higher
- Ability to pay the loan back
- Healthy cash reserves
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Can You Use A Heloc For A Down Payment On An Investment Property
A HELOC can be used to buy an investment property. In fact, if you are going to use a HELOC on anything, you might as well put it into a sound investment. Unleveraged equity is, after all, dead money that could end up costing you in the long run. Thanks largely, in part, to inflation, stagnant equity that isnt making any interest or return on investment is essentially throwing money away. That said, using equity to buy an investment property with a sound game plan is almost always preferred to using equity for anything else. Since a HELOC will use the home as collateral, its important to make sure the loan is worthwhile.
Can You Get A Heloc On A Rental Property
It is possible to get a home equity loan on a rental property, but its more complicated than it used to be. The qualifying criteria are stricter, and home equity lenders are focused on ensuring your ability to repay. Lending on investment properties is more expensive in general, and interest rates are higher than for primary homes.
Note that we discuss the process of cashing out home equity from your investment property below. If you’re interested in buying a rental property using the home equity from your primary residence, read our guide here*).
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Bank Of America Good For Lowest Advertised Rate
Bank of America is a large national bank with many locations. You can access its home equity line of credit offerings online or in person. It takes about 15 minutes to submit your application for a home equity line of credit online through Bank of America.
Bank of America is the second-largest bank in the U.S. with over 4,000 locations, making the lender very accessible.
Bank of America has no HELOC application fee, closing costs , or annual fee, and you can qualify for discounts on your HELOC interest rate:
- An interest rate discount for auto pay of 0.25% for setting up automatic payment at or prior to opening your HELOC account and maintaining them through an eligible Bank of America deposit account
- A 0.05% interest rate discount for every $10,000 initially withdrawn at account opening
- A 0.25% interest rate discount for a HELOC in a first lien position
- An interest rate discount of up to 0.375% for Preferred Rewards members with Bank of America
Theres also no fee to convert a withdrawal from your HELOC into a fixed-rate loan . Converting to a fixed rate will result in fixed monthly payments at a fixed interest rate. The minimum HELOC amount that can be converted at account opening is $5,000, and the maximum is 90% of your line amount with a minimum loan term of 1 year. You may also convert all or a portion of your outstanding HELOC variable-rate balance to a fixed rate option.
|Bank of America|