How to Get a Home Equity Loan or HELOC Using Your Rental Property

Sometimes people who own rental properties want to take out a home equity loan or home equity line of credit (HELOC) on that property. While it is possible, it does come with some challenges above and beyond getting a second mortgage on the home you live in.

The big reason that it is harder to get a HELOC or home equity loan on a rental property is that you do not live in the home. Lenders know that there is a higher chance you will default on a loan for a property that you do not occupy yourself. Lenders believe that you are more likely to make mortgage payments if you live under the threat of being homeless, so that is a good reason to stay current on your own home's mortgage.

But with investment properties, the risk is higher for lenders. This turned out to be the case from 2006 to 2009 when many small landlords could not find enough renters to make ends meet on their investment properties. There were millions of foreclosures. That is why some lenders still will not take applications for second mortgages for investment properties. But there are some that will.

How to Qualify

If you can find a lender who will issue a HELOC on your investment property, now you need to qualify. There usually are stiffer underwriting requirements to qualify for this type of loan. There are some lenders who will allow a loan to value above 80% but many will now cap it at 75%. This means the limit for borrowing on your HELOC, plus the balance of your first mortgage, cannot be more than 75% of the appraised value of the property.

You can expect your lender to look for higher expectations for your mortgage qualifications than you had when you got the mortgage on your own home:

• Debt to income ratio: This is the proportion of you total monthly debt payments compared to your gross income.
• Credit score: You will want to get your credit score as high as you can before you apply for a line of credit on your rental property. Also, reduce balances on credit cards as much as you can.
• Open accounts: Lenders will look closely at any credit accounts you have open that relate to your rental property as well as your bank accounts.
• Cash reserves: To reduce their risk, lenders may want you to have cash in the bank to make your HELOC payments if something bad happens, such as a renter falls behind on his payments.

Don't Risk Mortgage Fraud

Because of the tougher underwriting requirements for getting mortgages on investment properties, some landlords are tempted to lie on their mortgage application and say that they intend to live in the property. Be aware that lying on a mortgage application, including for second mortgages on investment properties, is a federal offense and is often investigated by the FBI. You can get up to 30 years in prison and a $1 million fine. If the lender suspects you are being untruthful about living in the home, they can and will investigate the matter to see who is living there. This is not something worth risking.

Alternatives to a HELOC or Home Equity Loan on Investment Property

Instead of getting a second mortgage, you may consider doing a cash out refinance on your property's first mortgage. If your new first mortgage is bigger than the old one, there should be cash left over and you can use that money as you like. This could be the best move if you are able to get a lower interest rate with a new first mortgage.

Doing a first mortgage refinance does have higher closing costs than a second mortgage. Many lenders also will have just as tough lending requirements on a refi application as on a HELOC or home equity loan for an investment property. But a refinance can be a good move for someone with a higher first mortgage interest rate.

Personal Loan

Many landlords do not even consider getting a personal loan instead of a second mortgage. But they do come with their own benefits. A personal loan has much lower set up costs and if you only need the money for a few years, they can often be less expensive than a second mortgage. Of course, the loan is unsecured and will come with a higher interest rate, but if you have a good credit score, you may be able to borrow up to $35,000 at a reasonable interest rate.

If you do end up wanting to get a second mortgage on your rental property, shop several lenders and make sure you get the best possible deal; a small difference in interest rate can cost you big over the years.