Challenges of Getting a Home Equity Loan on Rental Property

Aaron crowe
Written by
Aaron Crowe
Read Time: 5 minutes

Like many types of loans that were easy to get years ago during the housing crisis, home equity loans and other loans to cash out on equity in rental properties were relatively easy to get. Now, not so much.

"There's a higher risk with rental properties," says Todd Huettner, president of It may not be offered a home equity line of credit, or higher ability to repay.

To get a HELOC as a rental property owner, you may have to show that you can afford to repay the entire amount, says Lucas Hall, founder of Rental income information

In determining the ability to repay a HELOC or home equity loan, not all the rental income will be considered income, Ramnarain says, because renters may move out and landlords may have other problems.

For example, 75 percent of $1,000 in rental income would be counted as actual income, or $750, to account for other expenses as a rental property owner, he says.

Tax returns showing income generated from rentals may also be required, Hall says, as will copies of leases to show the rental home will be occupied for awhile and not just a few months.

More equity

Some lenders may require rental property owners to have more equity in their property before they approve a HELOC.

"What they really care about is if this property has enough equity for this HELOC," says Hall, adding that the process has been tightened a lot in the past six months.

Hall has refinanced loans and taken out equity so he can buy additional properties, and then refinanced that new property so he can pay back a line of credit on other rental properties, he says.

"I rarely ever use it, unless I have a big purchase coming up, such as another property," he says.

Lower loan-to-value ratio

A high loan-to-value ratio, or LTV, is a higher risk to a lender. A higher percentage of a property's cost that needs to be borrowed could make a home equity loan more difficult to get.

Lenders that may approve an LTV of 80 percent for a primary residence may require 70 percent or less LTV for rental property, Huettner says.

An LTV of 75 percent with 25 percent equity may be possible for rental property owners, Ramnarain says. Some homeowners can have LTV of 90 percent on their primary residence, he says.

Low debt-to-income ratio

While a homeowner might be allowed to have more than 40 percent of their income going toward debts and still be approved for a home equity loan, a rental property owner would likely have to lower that debt ratio to 30-35 percent of their income, Ramnarain says.

Higher interest rate or paying points

Refinancing a rental property loan to take cash out for repairs could require a higher interest rate or paying points because of the higher risk of rental property loans, Huettner says.

To keep the interest rate the same as a loan on a primary residence, a borrower may need to pay 2-3 points on the loan, he says. Or they could pay one-fourth to half a point more on the loan's interest rate, he says.

Higher credit score

Getting an equity loan on a rental property could require a credit score of 680, compared to 620 for a homeowner who lives in their home, Huettner says.

Rental property insurance

Banks may be especially vigilant about check that rental property owners have enough insurance, says Ramnarain.

"At the end of the day they're going to see if they're going to get their money" and if you have proper insurance, he says.

Up to 6 rentals

Lenders may cap the number of rental property mortgages at six, Ramnarain says. Four to six liens are possible for rental property owners, Huettner says.

Longer appraisal time

The waiting time to use a new appraisal, which will take into account repairs and renovations, for an investment property is 12 months from the date of purchase, says Elysia Stobbe, a landlord, mortgage professional and author of How to Get Approved For the Best Mortgage Without Sticking a Fork in Your Eye, a guide to home loans.

Usually two appraisals are required to confirm value, Stobbe says. Otherwise, if it's less than 12 months from the date of purchase, the last recorded sales price will be used, she says.

With all of those potential barriers to taking out equity on rental properties, investors may be best off doing what Hall aims to do with his rentals: have as much equity as he can in them so he can get a line of credit or loan when a major problem pops up on a rental property.

"I want my rental properties to have equity and then I want to have access to that equity," Hall says.

Further information

Passive income is what we all aspire to be making, but an in-depth cost-benefit analysis must be conducted for the plans' feasibility. As explained above, there are a few hurdles to overcome and your credit score will play a significant role, but with all things considered, it can still be worth your while.

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