Chances are you can’t secure financing on a non-owner occupied property as easily as you can your primary residence. It’s the same across the board. Even if you have perfect credit, lenders have tougher restrictions.
More borrowers default on investment properties. It makes sense. If you were in a financial crisis, what would you pay first? You would likely focus on the home you live in, letting the others go. That’s why a HELOC on an investment property may be more difficult. It’s not impossible though. We show you how below.
The first step may be the hardest. You must find a lender who will give you a HELOC on an investment property. Not many banks offer this. Searching for a lender online usually works best. You can research lenders outside of your local area. Once you find a few lenders, compare their offerings. Don’t focus on interest rates. Look at the whole package including:
- Underwriting requirements
- Turnaround times
- Closing costs
- Terms of the loan
- Amount they offer
- APR or annual percentage rate
Don’t forget about checking the reviews on your chosen lender. In today’s world, people love leaving positive and negative reviews on services they receive. Make sure the lender you choose works well with others so you can make the HELOC process as stress free as possible.
Prove You are a Good Risk
Financing a non-owner occupied property poses risks. HELOCs also pose risks. Combine the two and you pose serious issues for lenders. Overcome them by proving you are a good risk with any of the following:
Proving you can afford the loan helps. This doesn’t mean with a low debt ratio. Money you have on hand shows you can pay the mortgage payment no matter what happens. If your renters stop paying, you have funds for the mortgage. If an emergency occurs, you have funds available. Each lender requires a different amount of reserves. Try saving at least 12 months’ worth of your 1st and 2nd mortgage to be on the safe side.
Lots of Equity
The more equity you have in a property, the less risk you pose. Here’s an example:
Joe owes 80% of the value of his rental property. He wants a HELOC as an emergency fund in case anything goes wrong with the property. The HELOC would put him at 90% LTV.
Jan owes 60% of the value of her rental property. She wants a HELOC for the same reason. But, her HELOC would put her at 75% LTV.
Jan poses less risk because she owns more of the property. There’s 25% equity left in the property. If she defaults on her loans, there’s room in the equity for the 2nd lienholder. Oftentimes 2nd lienholders aren’t paid because the 1st lienholder took all of the funds. With more equity, there’s a higher likelihood of repayment.
High Credit Score
Higher credit scores offer more options, especially with a HELOC. Generally, you need a higher credit score for a first lien on a non-owner occupied property. Asking for a HELOC means you need even better credit. On an owner-occupied HELOC, you can get away with a credit score as low as 620 in some cases. On an investment property, most lenders prefer scores of at least 680, sometimes higher.
Before you apply, check on your credit score. If it’s on the lower side, figure out how you can improve it. A few simple fixes include:
- Bring all accounts current
- Pay down high credit card debt
- Pay collections/judgments
If you don’t have a high enough credit score, try again in a few months after fixing some of the issues.
Low Debt-to-Income Ratio
Next to your credit score, your debt ratio is next in line of importance. Your DTI shows lenders how much monthly income you commit to your debts. The lower your DTI, the better your chances of approval.
There’s no magic number for your DTI. Each lender sets their own requirements. The fewer debts you have, the better your chances. Before you apply for a HELOC for a non-owner occupied property, minimize your debts. Ask yourself:
- Can I pay off any credit card debt?
- Are any of my installment loans almost paid off?
If you can pay any debts off, do so before applying for the HELOC. Most lenders prefer a DTI within the 40% range. Of course, different lenders may have differing opinions.
Prove a Positive Rental History
If you rent out your properties, showing a positive rental history is important. The longer you can prove you successfully rented homes out, the better. This is especially true if the rental income helps you qualify for the loan. In this case, you’ll need the following:
- Executed lease agreement showing the terms of the rent including the amount and length of the contract
- Tax returns for the last 2 years showing your profit/loss from the investment property
- Canceled checks/bank statements showing receipt of the rental income
- The longer your lease terms and the more consistent the payments you receive, the better your chances of approval.
Consider Compensating Factors
Lenders don’t look at each factor individually when you apply for a HELOC. Instead, they focus on the big picture. For example, a borrower with a high LTV might seem like an unlikely candidate for the HELOC. But, if that same borrower has a very high credit score, it offsets the risk of the high LTV. This works with other factors as well. Low debt ratios often help applicants with other risky factors secure a HELOC.
Look at the whole puzzle, so to speak. What does your risk level look like putting it all together? No lender expects perfect credit, low debt ratios, and excessive equity. They allow a little give and take. Of course, the more positive factors you can provide, the better your chance of approval.
Securing a HELOC on a non-owner occupied property isn’t impossible. It does require some work, though. Consider your options and shop around! What one lender turns down, another might accept. Compare all aspects of the loan and choose the HELOC that serves your needs for your investment properties.