HELOCs for investment property: improve your odds of approval

Ginger Dean

June 4, 2013

By: Ginger Dean, Home Finance Specialist

In: Finance and Legal

Securing a HELOC (Home Equity Line of Credit) on a property other than your primary residence in today's market may prove difficult given the recent market shakedown. Lenders have become increasingly gun shy when it comes to lending money to investors because of the perception that investors abandoned their properties, contributing to the massive mortgage defaults.

However, as the market rebounds and banks regain their footing, more are reconsidering adding the HELOC to their product lineups. Investors are focused on making money, and it would make sense that the banks would want to help them do so, albeit with a great deal of caution.

One might ask what are the reasons that an investor would want to utilize a HELOC? Investors typically prefer using other people's money to make more money, thereby reducing the risk of losing their own. So, you can imagine why the banks might be ambivalent about lending an investor money, especially against property other than a primary residence. The prevailing theory is that investors are likely to try harder to save their primary residences than they would their investment properties. That said, a HELOC can be a great tool for leveraging the property's equity to purchase more investment properties and/or pay down/consolidate debt. Still, this doesn't happen so easily given the above-mentioned ambivalent relationship that banks have with real estate investors.

Potential issues

Potential issues that may arise during the application process are based on two potential red flags: bad credit and a lack of equity in the property. Bad credit is a major red flag for lenders; they want to know that their high-risk borrower utilizes credit in a responsible manner.

Survey lenders

Lenders who offer loans against investment properties are somewhat few and far between. Check with your local bank or credit union. Talk with other investors about good experiences they've had with their own lenders. Compare loan terms, home equity rates and fees to make sure that you're not reducing your profit margins by borrowing expensively.

Increasing odds for approval

  • Check your credit for any potential red flags prior to submitting an application, to eliminate any potential issues that might show up on your lender's radar. Remember, your application needs to be squeaky clean, devoid of any issues that might cause the lender to reject your application.
  • Determine the total equity in the property. Lenders typically like to see 25 percent equity in the property before granting a HELOC to an investor. Work with your lender to determine the current market value vs. what is owed on the property. Then you'll have a better understanding of how much you may be able to borrow.

Yes, securing a HELOC on an investment property may be difficult. but it isn't impossible. Check your credit, ascertain the amount of equity and survey local and national lenders to increase your odds of having your application approved.


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