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Rental Property HELOC for the Down Payment on a Home

Can you use a HELOC on a rental property for the down payment to buy another home?

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

It is definitely possible to use the proceeds from a home equity line of credit (HELOC) on a rental property for the down payment on another property.  In short, there are relatively few restrictions on how you can use the proceeds from a HELOC, regardless of the property type, but there are several points to consider if you want to use the funds to buy a home.

First, lenders typically apply stricter qualification requirements for a HELOC on an investment property, including using a lower loan-to-value (LTV) ratio.  Applying a lower LTV ratio may limit the size of the HELOC you qualify for and you may not be able to access sufficient funds for the down payment on the home you want to buy.

The maximum LTV ratio for a rental property HELOC varies by lender and other factors, including your credit score and debt-to-income ratio, but typically ranges from 75% to 85%.  If you have significant equity in the property, the LTV ratio is less of a factor but may create a challenge for applicants with less equity.

The second point to consider is that the HELOC is considered debt when you apply for the mortgage, which may make it more challenging to qualify for the loan.  Specifically, the monthly HELOC payment as well as the payments for any other loans on the rental property are included in your debt-to-income ratio.

You need to earn sufficient income from the rental property and other sources to afford these payments, the total monthly housing expense for the property you are buying -- which includes the mortgage payment, property tax and homeowners insurance -- plus the payments on any other personal debts including credit cards and car, personal and student loans.    

Additionally, the lender uses assumes that the HELOC is fully-drawn down, even if it is not, to calculate the monthly loan payment. For example, if you have a $20,000 outstanding balance on a $30,000 HELOC, the lender assumes the full $30,000 is outstanding when you apply for the mortgage.  Including a higher monthly HELOC payment can make it more challenging to qualify for the mortgage so you need to make sure you earn enough personal income to get approved.

If you are comfortable moving forward despite these considerations, the final point to keep in mind is that a relatively small number of lenders offer HELOCs on rental properties.  This is not to suggest that you cannot find them but you may need to shop around.

The table below shows HELOC and home equity loan rates and terms. We recommend that you contact multiple lenders to confirm their qualification requirements for a rental property HELOC and to find the most attractive loan terms.  Shopping lenders also enables you to find the program and guidelines that work best for you.   

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Current Home Equity Loan Rates as of July 11, 2020
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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click for more information on rates and product details.

Sources

"B3-4.3-15, Are proceeds from a HELOC on other real estate owned acceptable assets?"  Selling Guide: Fannie Mae Single Family.  Fannie Mae, October 30 2009.  Web.

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR.  Harry is a licensed mortgage professional (NMLS #236752). More about Harry

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