Home Equity Line of Credit (HELOC) residency requirements
A Home Equity Line of Credit (HELOC) is a convenient and flexible way to access the equity in your home. Many lenders will allow you to get a HELOC on a second home or investment property, meaning that there is usually no residency requirement for HELOC qualification.
To be eligible for a HELOC, you should have substantial equity in your home, ideally 20 to 40 percent. Additionally, having a good credit score and a low debt-to-income ratio can increase the likelihood of being approved. Furthermore, income documentation is required by lending institutions or banks to confirm that you are able to make regular payments on your HELOC loan.
Key Points: Can I get a HELOC on a property I don't live in?
Yes, it is possible to get a HELOC (Home Equity Line of Credit) on an investment property or second home.
Lenders may have specific requirements and restrictions for obtaining a HELOC on an investment property or second home.
The amount of equity you have in the property will determine the maximum loan amount you can get through a HELOC.
Interest rates for HELOCs on investment properties or second homes may be higher compared to primary residences.
Do I have to live in my home to qualify for a HELOC?
You do not leave to live in your home to qualify for a HELOC. Many, but not all, lenders and banks offer HELOCs on second properties and investment homes. Because lenders and banks perceive an increased risk of default on a HELOC on a second home, they often charge slightly higher interest rates. However, interest rates on a HELOC will still be lower than that on a personal loan, credit card, or other unsecured loan.
What is a Home Equity Line of Credit (HELOC)
A HELOC, or Home Equity Line of Credit, is a type of second mortgage. It allows you to borrow against the equity you have in your home, in order to access lower interest rates and more flexible borrowing terms than with unsecured loans or credit cards.
How a HELOC works
A HELOC is a great way to utilize the equity in your home without having to take out a high-interest, unsecured, personal loan. A HELOC functions similarly to a credit card, but instead of accessing money from a single account, you can repeatedly pull from and pay off your fund. You can usually access up to 80% of your home’s equity with a HELOC through different lenders who have varied repayment terms up to 30 years long.
Unlike credit cards, however, when it comes to borrowing against your equity with a HELOC, the term is split into two distinct periods: the draw period and the repayment period. During the draw period, which spans around five to 15 years (depending on the lender), you can make multiple withdrawals without needing to make minimum payments, just like with a credit card. However, once you reach your repayment period – typically 10 to 20 years long – you no longer have access to withdrawing funds but must repay any amount borrowed during the initial draw period of that same term.
Qualification requirements for a HELOC
Banks, credit unions, and other lenders vary in their requirements for HELOC qualification, as well as borrowing terms and interest rates. Some lenders will qualify homeowners for a HELOC on a home that they do not live in, and while others will not, so it is important to do your research.
Common qualification factors on all HELOCs include having accrued equity on the property, having a good credit score, good credit history, and a low debt-to-income ratio.
Have built up equity in your home
Equity is the difference between what you owe on your mortgage and what your home is currently worth. To be approved for a HELOC, it is generally recommended that you have at least 15 to 20% equity in your home.
Your loan-to-value (LTV) ratio will also impact whether or not you qualify - this can be calculated by dividing your mortgage balance by your home’s current value. Additionally, lenders will consider all of the debt on the property against its value, known as the combined loan-to-value (CLTV) ratio. Most lenders prefer to see that your CLTV does not exceed 85%, though some may take ratios up to 90%. Ultimately, when assessing if you are eligible for a HELOC it's best to understand how much equity is in your home and work with an experienced lender who can walk you through your options.
Have a good credit score and repayment history
Having good credit is essential when it comes to getting approved for a loan or line of credit. Lenders typically review your credit score and history to determine whether you're a risky investment—and if you can afford the loan in the first place. If you want to qualify for a Home Equity Line of Credit (HELOC), it's prudent to make sure your credit score falls in the mid-to-high 600s—the higher, the better. Your score should ideally be 700 or higher for most lenders.
Having a good payment history is also essential for securing a home equity line of credit (HELOC). Lenders will review your payment history to determine whether you are a reliable borrower. They may even evaluate this more intensely than your credit score, so it’s important to show on-time payments. This could be through a track record of loan or mortgage payments, any other type of revolving debt, or even recent utility bills. Demonstrating that you are responsible enough to stay current with your debts reassures the lender that they will get their money back.
Demonstrate sufficient income
In order to get approved for a Home Equity Line of Credit (HELOC), the lender will need to see that you have enough income to make all of the necessary loan repayments. The best way to prove this is through income documentation such as W-2s, pay stubs, federal tax returns, and Social Security benefit verification letters. This documentation will provide lenders an inside look at your ability to afford a HELOC so they can feel safe in offering this type of loan.
Have a low debt load
Having a low amount of debt can be beneficial in many ways. One major advantage is your debt-to-income (DTI) ratio, which indicates how much debt you owe relative to your income. This is important because many lenders require potential borrowers to have a low DTI ratio before they will consider approving loan applications. The lower this ratio, the more likely a lender will be willing to work with you and approve a loan. Additionally, some lenders even set specific thresholds for DTI ratios; for example, it may be difficult for someone to qualify for a HELOC with a DTI ratio higher than 43% or 50%.
The bottom line
Getting a Home Equity Line of Credit (HELOC) on a second home or investment property is possible with the right qualifications. To ensure your application goes as smoothly as possible, it’s important to have a good credit score, repayment history, demonstrate sufficient income, and maintain a low debt load. Additionally, it’s essential to understand how much equity is in your home and work with an experienced lender who can walk you through your options before making a final decision.
