Home equity lines of credit are popular financing options for homeowners all across the country. Allowing people to take advantage of their home’s equity, these lines of credit can be used for home repairs, investments, or the purchase of new property.
While these types of credit lines are common for personal homes, some investors are not aware that they are available for investment properties as well. If you have an investment property on which you have significant equity, you can actually use that equity to help improve your properties, create new investment opportunities, or consolidate your debt profile.
It takes the right lender, but investment property lines of credit could help expand, improve, or simplify your overall financial portfolio.
What is an Investment Property Equity Line of Credit?
A home equity line of credit is simply an available account of money from which you can withdraw, then pay back over time. It’s similar to a credit card, in that you have a set amount of money that you can borrow. Unlike a credit card, which is “unsecured,” these lines of credit, often called “LOCs,” are secured by your home or property. If, for whatever reason, you are unable to repay the money you borrowed, the lender has a legal right to seize your property. In legal terms, this right is called a “lien.”
Types of Lines of Credit for Investment Property
Line of Credit on a Single Investment Property
This is a line of credit that gives you access to funds based on one property. In overall structure, it is similar to a traditional HELOC on your home, allowing you to create a line of credit and use only what you need and only pay interest on what you borrow. (For example, if the line of credit is for $50,000 but you only withdraw $20,000, you would only pay interest on the $20,000.)
As we said, this is a line of credit on your investment property, not on your home. This means that some of the details will be slightly different. For example, the credit score requirements or interest rate could be higher, simply because lending money on investment property can create larger risk to the lender. In most cases, the line of credit can be used for anything related to the single property, but there are variations in the allowable use.
To qualify, your investment property will need to meet certain qualifications. The specifics will depend on the exact line of credit you choose, but you will need a strong credit score, and the investment property usually has to be a single-family home or a property with no more than five units. You will also need a low debt-to-income ratio; usually 45% of less. You must leave some equity in the property. For most lines of credit, you’ll have to leave at least 10% to 20% in the property. In other words, even if you have 100% equity in the property, you can’t borrow on the full amount.
Line of Credit on a Portfolio Investment Property
The other common type of investment property line of credit is on a portfolio. Basically, these are for high-net-worth investors who have over $1 million in equity or own a large portfolio of properties. These lines of credit are used by large investors who would like to avoid raising capital, and they are often used to purchase new properties that will be added to the portfolio, although they can also be used to improve or rehab properties already owned by the investor or investment group.
They are meant for portfolios, but they still work for larger investors. If you have an expensive single-asset investment property, you may be able to use this type of line of credit to your advantage.
Qualification is very similar to single-property LOCs, but they may have even stricter requirements. You will need to have a strong credit score, and much of the approval process will be based on your financial picture, including assets, salary, and total value of the investments.
Applying for a Line of Credit on Your Investment Property
The approval process requires a meticulous inspection of your finances and credit picture, but approval is more attainable than you might think.
The first step, of course, is to choose the right line of credit. To find the right option, you’ll have to analyze your current investment properties and your future financial goals. Obviously if you only own one moderately-priced investment property, then only single-property lines of credit will be available. However, if you own a large portfolio and want to borrow a significant number, then you’ll likely want a portfolio line of credit.
The next step is to collect all the documents you need. You will need proof of ownership on the property, as well as lien-holder’s information if there are any liens against your investment or if there is a current mortgage on the property. Any documents that are related to the property should be ready for the lender. You’ll also want to give access to the lender to pull your credit score, and may need paystubs or bank statements, as well as two years of tax returns.
SDPL Proudly Offers Fantastic Lines of Credit on Investment Property
At San Diego Purchase Loans, we strive to offer some of the finest loan products on the market. From traditional home loans to jumbo loans for investment properties, we proudly help people find the right loans for their exact needs. One of the products we can help with are lines of credit on investment properties.
Working with our team, you can get a 5-year draw period or a 10-year draw period on your line of credit. There is a minimum HELOC of $10,000, and the maximum line of credit you can secure is $250,000, and there is a maximum loan-to-value of 80%. The draw-back of the program is the 10-year term, and there will need to be a two-year tax return income analysis to qualify. With this option, you will be able to get the financing you need for a wide variety of purposes!
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