The Guide to Non-Owner Occupied Home Equity Lines of Credit

Equity in a home can be a fantastic resource for any homeowner. Not only does it increase with the home value your market dictates, but it can also be a great way to access tens of thousands of dollars through a line of credit to use however you see fit. But what if you own more than one home? Are there non-owner-occupied home equity lines of credit available?

Lines of credit for non-owner occupied homes are available, but they’re not as easy to get as it is on your primary residence. Few lenders are willing to take the risk, and it may be nearly impossible to get financing on 2nd or 3rd positions. If you can offer 1st position on the title, you may have a higher chance of being approved for a line of credit on a property that isn’t your main home.

While it may be an uphill battle, getting a line of credit on an investment property or vacation home isn’t impossible. Let’s dive into what exactly a line of credit is, where you might be able to find willing lenders and my tips for how to use the money in a way that expands your real estate investment portfolio.

What is an Equity Line of Credit?

Equity means the amount of value you as the homeowner owns outright on a property. For example, if your home has a value of $200,000 and you owe $120,000 on a mortgage, then you are considered to have $80,000 in equity on your home.

An equity line of credit is when a homeowner borrows against that equity. Some stipulations go along with borrowing against your equity, and it’s important to note that many banks will offer you only up to 90% of the available equity. 

This loan can be given in two ways. The first is what’s known as a Home Equity Line of Credit (HELOC). HELOCs are run essentially the same way as a secured credit card; it’s a revolving credit line borrowed against your equity that can be dipped into multiple times as needed. 

The second way is through a Home Equity Loan. Unlike HELOCs, equity loans are run just like traditional loans. The loan is deposited into your bank account all at once and must be repaid in full within a certain amount of time.

Lines of credit, in my opinion, are a better route to go for real estate investment as they don’t accrue interest until you draw against them. HELOCs are tied to a prime rate like a credit card, but they’ll often have a floor and ceiling rate listed. This means that the prime rate will be within a specific range and will never go under a certain percentage or another percentage. So if your HELOC has a range of 11% – 18%, that means it will never go under 11% and will never be higher than 18%.

What Does “Non-Owner Occupied” Mean?

Non-owner occupied simply means that you are the property owner, but it’s not considered your primary residence. It may be a vacation home, a property you rent out, or some other type of investment like a fix & flip you haven’t yet sold off.

How Can I Get Non-Owner Occupied Home Equity Lines of Credit?

Getting a non-owner-occupied HELOC is not an easy process, so I would advise that if you’re thinking about applying for one that you don’t wait until you’re in a desperate situation where you need those funds.

Finding a lender is incredibly challenging, especially if your HELOC will be a 2nd or 3rd position on the title. Having anything other than a 1st position means that if something happens where you cannot keep up with your payments and end up in default, bankruptcy, or foreclosure, the lender holding the 1st position has a higher priority at getting their debt repaid than lenders, which hold 2nd or 3rd.

Lenders are more likely to offer LOCs if they acquire 1st position on the title. The easiest way to offer this is to own the home outright (meaning you have no mortgage or other debts against the property) or have enough equity that your LOC will be able to pay off the remainder of the mortgage. 

To be totally transparent, when I’ve attempted to do a non-owner occupied line of credit, it’s taken me about 30 tries to find a willing lender. It hasn’t mattered what my previous relationship is with them; lenders are just really wary of doing it. I’ve found credit unions to be more favorable than big banks, but even then, you need to be explicitly clear at the start what you’re attempting to do. 

When you’re reaching out to lenders, be sure to specify that the property is non-owner occupied and ask if they’re willing to hold a 2nd position. This will save you a ton of time and effort further down the road. 

How Can I Use the Money from a Line of Credit?

Let’s say that you’ve found a lender that’s willing to roll the dice and give you a line of credit on the home that isn’t your primary residence. Congratulations! Now that you’ve got that equity in the form of some extra cash, what should you do with it?

In truth, you can do whatever you want with the money. If you’re a real estate investor, then I’d recommend using that HELOC to invest in new properties, fix & flip homes currently in your portfolio, or upgrade and remodel rentals to get a better price from new tenants.

While it’s your money to do whatever you want with, there are a few things I’d advise not doing with it. HELOCs shouldn’t be used for impulse purchases or family vacations, as I think there’s just too much at stake to lose if you fall behind on payments. I also wouldn’t recommend using the line of credit to pay off the remainder of your mortgage. While it might feel great to remove that burden, your mortgage is most likely at a fixed rate that is significantly less than your HELOC’s prime rate. Switching the mortgage for a HELOC can end up costing you more money…and that’s just not worth the peace of mind that comes with paying off a mortgage.

Final Thoughts

Suppose you’re thinking about using the equity you have in a second home or investment property to your advantage. In that case, you may be able to expand your real estate portfolio (or improve the properties you already have). It’s important to understand that this won’t be as easy as it would on your primary residence as many lenders hesitate to take the risk. If you’re able to find a lender that’s willing to give it a shot, be sure you have a plan for how you can use that money in a smart way that increases your real estate portfolio and enhances your cash flow.

Have you been able to receive a HELOC on a non-owner-occupied property successfully? We’d love to hear how you did it! Leave a comment with your tips below. 

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