What are some key factors when comparing HELOC lenders?

Question

Good morning Bigger Pockets Community,

I have some equity in my current single family home rental that I’d like to access to purchase a second rental property. Based on my current loan and financial situation a HELOC looks like it would be my best option to fund this 2nd investment purchase.

I have never applied for a HELOC before, what are some key factors to look for when comparing HELOC lenders? What questions should I be asking the lender?

Thanks in advance!

-Craig

Eli Lederman · Answer

Closing costs

Kyle J. · Answer

It's hard to say since many lenders are regional and your profile doesn't say where you're located.   A few lenders that I know do HELOCs on rentals are PenFed, Wells Fargo, and Union Bank.  (PenFed will do the best LTV I've heard of on a rental, which is up to 80%.)  To find the best one for your situation and in your area though, it might take some calling around to different lenders.

@Bob M. To answer your question about dinging your credit, applying for a HELOC was similar to applying for a mortgage.  I applied for (and obtained) two around the same time and it didn't hurt my credit.  Even if you shop around with different lenders, any inquiries to your credit report within a 30 day period for the same purpose (i.e. mortgage loan) are treated/scored as just one inquiry, and one inquiry (according to MyFico) should at most lower your credit score by no more than 5 points.  And even that would be temporary.  From my own personal experience, my credit score was above 800 before I obtained the HELOCs, and it was after too.

Craig Ebersole · Answer

@Kyle J. Thank you so much for the link to that blog post that you made. That was incredibly helpful. There are a lot of lenders out there... are there any in particular you'd recommend? Also as a general rule of thumb, would you try first at smaller credit unions, larger banks, or some of the online lenders?@Axel Meierhoefer Thanks for your comment. Those are good details to consider. I'll be sure to clarify that with the lender.

Axel Meierhoefer · Answer

@Craig Ebersole, @Bob M. Guys, Kyle's resource is one of the best I have seen and should help you a lot. Lending on rental/investment properties versus personal residence is different and sometimes the criteria are really unfavorable for HELOC on rentals.

One thing I like to add for you guys to consider is rules regarding arbitration. USing one loan to serve another loan. It does not apply if you use the HELOC amount to 100% purchase your investment, but when you want to buy the new investment with a mortgage or commercial loan and use the downpayment from a HELOC it could be seen as a loan on a loan. I am not a banker or lawyer but have been warned several times about it in transactions. You probably have heard that underwriters want to see where your funds are to make sure you can afford your downpayment. If you take the amount it would take and put it from your HELCO into a savings account you have to pay a little interest on the HELOC for a month or 2 but you would avoid giving the impression that you are using one loan to fund another loan.

Bob M. · Answer

Hi Craig,

I'm in a similar situation (hope you don't mind me piggybacking your post), 1st time applying for a HELOC, actually meeting with a small bank this afternoon regarding HELOC on my primary residence for down payment on an investment property.  I just printed Kyle's article (thanks Kyle) which has some great info and questions to ask.

One additional question, maybe Kyle could answer, does applying for and/or obtaining a HELOC ding your credit at all?

Thanks,Bob

Kyle J. · Answer

@Craig Ebersole I have a couple HELOCs on my rentals. Here’s some questions to ask and things to consider when shopping around and comparing lenders:

What You Need to Know When Shopping for a HELOC