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Recourse loans are secured loans in which the lender can seize a borrower’s collateral and, if necessary, other assets, should the borrower default on the loan. Common types of recourse debt are auto loans, credit cards and, in most states, home mortgages. Recourse loans are low risk to lenders so they tend to have lower interest rates than non-recourse loans.

Non-recourse loans are also secured by collateral but in this case, the lender can only seize the collateral pledged for the loan; they can’t take any other assets. Non-recourse loans are less common than recourse loans and tend to have higher interest rates due to their higher risk.

Read on to learn more about how non-recourse and recourse loans compare.

What Is a Recourse Loan?

A recourse loan is a secured loan for which the lender can seize more than just the collateral if the borrower defaults. The lender is also able to seize other assets the borrower didn’t use as collateral, including income and money in bank accounts.

How Recourse Loans Work

When a borrower defaults on a recourse debt, the lender can seize not only the loan’s collateral, but can also attempt to attach other assets to collect what’s owed. In essence, the lender has additional recourse to recoup their losses.

Between recourse vs. nonrecourse debt, recourse debt favors the lender while nonrecourse debt favors the borrower.

Examples of Recourse Loans

Hard money loans, which are typically based on the value of the collateral rather than just the creditworthiness of the borrower, tend to be recourse loans.

An auto loan is one example of a recourse loan. If an auto loan borrower defaults on the loan, the lender has the right to seize the vehicle and sell it to recoup its losses. If the vehicle has depreciated, however, and the sale doesn’t cover the loan balance, the lender can ask for a deficiency judgment for the difference. In that case, the borrower’s wages could be garnished or the lender could seize other assets.


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What Is a Non-Recourse Loan?

A nonrecourse loan is a secured loan for which the lender cannot seize assets that weren’t put up as collateral in the original loan agreement.

How Non-Recourse Loans Work

When a borrower pledges collateral on a secured loan, the lender can take that asset — but no others — if the borrower defaults on the loan. The lender will typically sell the asset to recoup their loss on the loan. The lender has no other recourse than seizing the collateralized asset, even if the sale of that asset doesn’t cover the balance of the loan.

Examples of Non-Recourse Loans

Lenders may be cautious about offering non-recourse loans because it limits their ability to recoup losses in the event of a default. Therefore, loans are typically classified as recourse loans.

Mortgages are classified as non-recourse debt as a matter of law in 12 states, meaning the lender cannot pursue a borrower’s other assets if they default and end up in foreclosure. The financial consequences would likely be limited to foreclosures of the home and damage to the borrower’s credit score.

A lender might be willing to offer a non-recourse loan to an applicant with excellent credit and steady, verifiable income if confident in their ability to repay the debt.

Recourse vs Non-Recourse Loans

Both recourse and non-recourse debt can be secured by collateral, which a lender can seize in the event of nonpayment.

The biggest difference between the two is that the lender is prevented from pursuing other assets owned by the borrower to repay what’s owed on a non-recourse debt. Basically, the lender has no other recourse for repayment of the debt other than the collateral that secures the loan.

Recourse Loan	Non-Recourse Loan
Lender can seize assets other than those put up as collateral	Lender can seize only assets that were put up as collateral
Borrower can lose collateralized and other assets if they default	Borrower can lose collateralized asset and have a negative entry on their credit report if they default
Loan rate and terms are based on the value of asset used as collateral and creditworthiness of applicant	Lender may consider creditworthiness of applicant greater than value of collateral when determining loan rate and terms
Less risky for lenders	Less risky for borrowers

Pros and Cons of Recourse vs Non-Recourse Debt

Depending on whose perspective the situation is being viewed from, recourse and non-recourse debt each has benefits and drawbacks.

Pros and Cons of Recourse Loans

Recourse debt is more favorable to the lender than the borrower because this type of debt gives the lender more avenues to collect when a debt goes unpaid.

Approval for recourse loans, on the other hand, may be easier since they pose less risk for lenders.

From the borrower’s perspective, here are some pros and cons of recourse loans:

Pros of Recourse Loans	Cons of Recourse Loans
Approval qualifications may be less stringent than for a nonrecourse loan	Lender can seize collateralized asset and other assets if the borrower defaults
Interest rates can potentially be low	Borrower assumes greater risk than lender

Pros and Cons of Non-Recourse Loans

A non-recourse loan is more favorable to the borrower in the case of default. In that situation, the lender could only seize the asset put up as collateral, but couldn’t lay claim to any of the borrower’s other assets.

Non-recourse financing is usually riskier for the lender since they’re limited to collecting only the collateral when a borrower defaults. As such, lenders may charge higher interest rates for non-recourse loans and/or require borrowers to meet higher credit scores and income requirements to qualify.

From the borrower’s perspective, here are some pros and cons of non-recourse loans:

Pros of Non-Recourse Loans	Cons of Non-Recourse Loans
Only the asset put up as collateral can be seized if the loan is defaulted on	Borrower’s credit can be negatively affected if the lender must write off uncollected debt
Personal assets are not at risk	Interest rates may be high

Managing Recourse vs Non-Recourse Loans

Generally, the only reason for a borrower to be concerned about whether they have recourse vs. non-recourse debt is if they’re in danger of default. As long as they’re keeping up with their payments, whether a debt is recourse or non-recourse shouldn’t be an issue.

But if there is a concern about potentially falling behind in paying a debt, then it helps to do some research before borrowing. For example, if trying to qualify for a home loan, asking upfront whether the loan is treated as recourse or non-recourse debt under a particular state’s laws will help in the decision making.

Making a larger down payment, for example, means less a borrower has to finance. Ultimately, though, a borrower should do what is right for their particular financial situation. It may be better for some borrowers to choose a home loan that allows for a lower down payment so they can keep more cash in the bank to cover financial emergencies down the line.

If you’re planning to apply for a car loan, you might consider buying a vehicle that tends to hold its value longer or making a larger down payment. Those could both help you avoid ending up underwater on the loan if you happen to default for any reason.

Credit cards are revolving debt, not a lump sum being borrowed, so the amount owed can change month to month as purchases are made and paid off. Some ways to manage this type of recourse debt include:

•   Keeping card balances low

•   Paying the balance in full each month, if possible

•   Setting up automatic payments or payment alerts as notification of when a due date is approaching

With any type of debt, recourse, or non-recourse, it’s important that you get in touch with your lender or creditor as soon as you think you’ll have trouble making payments. The lender may be able to offer options to help you manage payments temporarily. Depending on the type of debt, that may include:

•   Credit card hardship programs

•   Student loan forbearance or deferment

•   Mortgage forbearance

•   Skipping or deferring auto loan payments

Reaching out before a payment is missed can help you avoid loss of assets, as well as any negative impact on your credit.


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Is a Recourse or a Non-Recourse Loan Best for You?

It’s likely you won’t have much of a choice between a recourse and a Non-Recourse loan when looking at financing options. Lenders are likely to offer only recourse loans because they have more options to recover losses if the borrower defaults on the loan.

If you are presented with both options, choosing a recourse or Non-Recourse loan may depend on your financial situation.

•   A recourse loan may be a good option for those with a limited credit history because in exchange for additional avenues to recoup their losses, if necessary, a lender may offer low interest rates.

•   A non-recourse loan could be a good option for an applicant with good credit and steady income, as the lender may consider them a low-risk borrower and not feel the need to have additional assets to secure the loan.

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FAQ

What does recourse mean in lending?

Recourse refers to a lender’s options when recouping losses when a borrower defaults on a loan. With a recourse loan, lenders can recoup defaulted loan balances by seizing both the loan collateral and — when necessary — the borrower’s other assets.

Are you required to pay a non-recourse loan?

Yes, borrowers are required to make payments on both recourse and non-recourse loans.

Are non-recourse loans more expensive?

Non-recourse loans can have higher interest rates than recourse loans because lenders may perceive them as having higher risk.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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If you own a home, you may be interested in tapping into your available home equity. One popular way to do that is with a home equity line of credit. This is different from a home equity loan, and can help you finance a major renovation or many other expenses.

Homeowners sitting on at least 20% equity — the home’s market value minus what is owed — may be able to secure a HELOC.Let’s take a look at what is a HELOC, how it works, the pros and cons and what alternatives to HELOC might be.

How Does a HELOC Work?

The purpose of a HELOC is to tap your home equity to get some cash to use on a variety of expenses. Home equity lines of credit offer what’s known as a revolving line of credit, similar to a credit card, and usually have low or no closing costs. The interest rate is likely to be variable (more on that in a minute), and the amount available is typically up to 85% of your home’s value, minus whatever you may still owe on your mortgage.

Once you secure a HELOC with a lender, you can draw against your approved credit line as needed until your draw period ends, which is usually 10 years. You then repay the balance over another 10 or 20 years, or refinance to a new loan. Worth noting: Payments may be low during the draw period; you might be paying interest only. You would then face steeper monthly payments during the repayment phase. Carefully review the details when apply

Here’s a look at possible HELOC uses:

•   HELOCs can be used for anything but are commonly used to cover big home expenses, like a home remodeling costs or building an addition. The average spend on a bath remodel in 2023 topped $9,000 according to the American Housing Survey, while a kitchen remodel was, on average, almost $17,000.

•   Personal spending: If, for example, you are laid off, you could tap your HELOC for cash to pay bills. Or you might dip into the line of credit to pay for a wedding (you only pay interest on the funds you are using, not the approved limit).

•   A HELOC can also be used to consolidate high-interest debt. Whatever homeowners use a home equity credit line or home equity loan for — investing in a new business, taking a dream vacation, funding a college education — they need to remember that they are using their home as collateral. That means if they can’t keep up with payments, the lender may force the sale of the home to satisfy the debt.

HELOC Options

Most HELOCs offer a variable interest rate, but you may have a choice. Here are the two main options:

•   Fixed Rate With a fixed-rate home equity line of credit, the interest rate is set and does not change. That means your monthly payments won’t vary either. You can use a HELOC interest calculator to see what your payments would look like based on your interest rate, how much of the credit line you use, and the repayment term.

•   Variable Rate Most HELOCs have a variable rate, which is frequently tied to the prime rate, a benchmark index that closely follows the economy. Even if your rate starts out low, it could go up (or down). A margin is added to the index to determine the interest you are charged. In some cases, you may be able to lock a variable-rate HELOC into a fixed rate.

•   Hybrid fixed-rate HELOCs are not the norm but have gained attention. They allow a borrower to withdraw money from the credit line and convert it to a fixed rate.

Note: SoFi does not offer hybrid fixed-rate HELOCs at this time.

HELOC Requirements

Now that you know what a HELOC is, think about what is involved in getting one. If you do decide to apply for a home equity line of credit, you will likely be evaluated on the basis of these criteria:

•   Home equity percentage: Lenders typically look for at least 15% or more commonly 20%.

•   A good credit score: Usually, a score of 680 will help you qualify, though many lenders prefer 700+. If you have a credit score between 621 and 679, you may be approved by some lenders.

•   Low debt-to-income (DTI) ratio: Here, a lender will see how your total housing costs and other debt (say, student loans) compare to your income. The lower your DTI percentage, the better you look to a lender. Your DTI will be calculated by your total debt divided by your monthly gross income. A lender might look for a figure in which debt accounts for anywhere between 36% to 50% of your total monthly income.

Other angles that lenders may look for is a specific income level that makes them feel comfortable that you can repay the debt, as well as a solid, dependable payment history. These are aspects of the factors mentioned above, but some lenders look more closely at these as independent factors.

Example of a HELOC

Here’s an example of how a HELOC might work. Let’s say your home is worth $300,000 and you currently have a mortgage of $200,000. If you seek a HELOC, the lender might allow you to borrow up to 80% of your home’s value:

   $300,000 x 0.8 = $240,000

Next, you would subtract the amount you owe on your mortgage ($200,000) from the qualifying amount noted above ($240,000) to find how big a HELOC you qualify for:

   $240,000 – $200,000 = $40,000.

One other aspect to note is a HELOC will be repaid in two distinct phases:

•   The first part is the draw period, which typically lasts 10 years. At this time, you can borrow money from your line of credit. Your minimum payment may be interest-only, though you can pay down the principal as well, if you like.

•   The next part of the HELOC is known as the repayment period, which is often also 10 years, but may vary. At this point, you will no longer be able to draw funds from the line of credit, and you will likely have monthly payments due that include both principal and interest. For this reason, the amount you pay is likely to rise considerably.

Difference Between a HELOC and a Home Equity Loan

Here’s a comparison of a home equity line of credit and a home equity loan.

•   A HELOC is a revolving line of credit that lets you borrow money as needed, up to your approved credit limit, pay back all or part of the balance, and then borrow up to the limit again through your draw period, typically 10 years.

   The interest rate is usually variable. You pay interest only on the amount of credit you actually use. It can be good for people who want flexibility in terms of how much they borrow and how they use it.

•   A home equity loan is a lump sum with a fixed rate on the loan. This can be a good option when you have a clear use for the funds in mind and you want to lock in a fixed rate that won’t vary.

Borrowing limits and repayment terms may also differ, but both use your home as collateral. That means if you were unable to make payments, you could lose your home.

Recommended: What are the Different Types of Home Equity Loans?

What Is the Process of Applying for a HELOC?

If you’re ready to apply for a home equity line of credit, follow these steps:

•   First, it’s wise to shop around with different lenders to reveal minimum credit score ranges required for HELOC approval. You can also check and compare terms, such as periodic and lifetime rate caps. You might also look into which index is used to determine rates and how much and how often it can change.

•   Then, you can get specific offers from a few lenders to see the best option for you. Banks (online and traditional) as well as credit unions often offer HELOCs.

•   When you’ve selected the offer you want to go with, you can submit your application. This usually is similar to a mortgage application. It will involve gathering documentation that reflects your home’s value, your income, your assets, and your credit score. You may or may not need a home appraisal.

•   Lastly, you’ll hopefully hear that you are approved from your lender. After that, it can take approximately 30 to 60 days for the funds to become available. Usually, the money will be accessible via a credit card or a checkbook.

How Much Can You Borrow With a HELOC?

Depending on your creditworthiness and debt-to-income ratio, you may be able to borrow up to 90% of the value of your home (or, in some cases, even more), less the amount owed on your first mortgage.

Thought of another way, most lenders require your combined loan-to-value ratio (CLTV) to be 90% or less for a home equity line of credit.

Here’s an example. Say your home is worth $500,000, you owe $300,000 on your mortgage, and you hope to tap $120,000 of home equity.

Combined loan balance (mortgage plus HELOC, $420,000) ÷ current appraised value (500,000) = CLTV (0.84)

Convert this to a percentage, and you arrive at 84%, just under many lenders’ CLTV threshold for approval.

In this example, the liens on your home would be a first mortgage with its existing terms at $300,000 and a second mortgage (the HELOC) with its own terms at $120,000.

How Do Payments On a HELOC Work?

During the first stage of your HELOC (what is called the draw period), you may be required to make minimum payments. These are often interest-only payments.

Once the draw period ends, your regular HELOC repayment period begins, when payments must be made toward both the interest and the principal.

Remember that if you have a variable-rate HELOC, your monthly payment could fluctuate over time. And it’s important to check the terms so you know whether you’ll be expected to make one final balloon payment at the end of the repayment period.

Pros of Taking Out a HELOC

Here are some of the benefits of a HELOC:

Initial Interest Rate and Acquisition Cost

A HELOC, secured by your home, may have a lower interest rate than unsecured loans and lines of credit. What is the interest rate on a HELOC? The average HELOC rate in mid-November of 2024 was 8.61%.

Lenders often offer a low introductory rate, or teaser rate. After that period ends, your rate (and payments) increase to the true market level (the index plus the margin). Lenders normally place periodic and lifetime rate caps on HELOCs.

The closing costs may be lower than those of a home equity loan. Some lenders waive HELOC closing costs entirely if you meet a minimum credit line and keep the line open for a few years.

Taking Out Money as You Need It

Instead of receiving a lump-sum loan, a HELOC gives you the option to draw on the money over time as needed. That way, you don’t borrow more than you actually use, and you don’t have to go back to the lender to apply for more loans if you end up requiring additional money.

Only Paying Interest on the Amount You’ve Withdrawn

Paying interest only on the amount plucked from the credit line is beneficial when you are not sure how much will be needed for a project or if you need to pay in intervals.

Also, you can pay the line off and let it sit open at a zero balance during the draw period in case you need to pull from it again later.

Cons of Taking Out a HELOC

Now, here are some downsides of HELOCs to consider:

Variable Interest Rate

Even though your initial interest rate may be low, if it’s variable and tied to the prime rate, it will likely go up and down with the federal funds rate. This means that over time, your monthly payment may fluctuate and become less (or more!) affordable.

Variable-rate HELOCs come with annual and lifetime rate caps, so check the details to know just how high your interest rate might go.

Potential Cost

Taking out a HELOC is placing a second mortgage lien on your home. You may have to deal with closing costs on the loan amount, though some HELOCs come with low or zero fees. Sometimes loans with no or low fees have an early closure fee.

Your Home Is on the Line

If you aren’t able to make payments and go into loan default, the lender could foreclose on your home. And if the HELOC is in second lien position, the lender could work with the first lienholder on your property to recover the borrowed money.

Adjustable-rate loans like HELOCs can be riskier than others because fluctuating rates can change your expected repayment amount.

It Could Affect Your Ability to Take On Other Debt

Just like other liabilities, adding on to your debt with a HELOC could affect your ability to take out other loans in the future. That’s because lenders consider your existing debt load before agreeing to offer you more.

Lenders will qualify borrowers based on the full line of credit draw even if the line has a zero balance. This may be something to consider if you expect to take on another home mortgage loan, a car loan, or other debts in the near future.

What Are Some Alternatives to HELOCs

If you’re looking to access cash, here are HELOC alternatives.

Cash-Out Refi

With a cash-out refinance, you replace your existing mortgage with a new mortgage given your home’s current value, with a goal of a lower interest rate, and cash out some of the equity that you have in the home. So if your current mortgage is $150,000 on a $250,000 value home, you might aim for a cash-out refinance that is $175,000 and use the $25,000 additional funds as needed.

Lenders typically require you to maintain at least 20% equity in your home (although there are exceptions). Be prepared to pay closing costs.

Generally, cash-out refinance guidelines may require more equity in the home vs. a HELOC.

Recommended: Cash Out Refi vs. Home Equity Line of Credit: Key Differences to Know

Home Equity Loan

What is a home equity loan again? It’s a lump-sum loan secured by your home. These loans almost always come with a fixed interest rate, which allows for consistent monthly payments.

Personal Loan

If you’re looking to finance a big-but-not-that-big project for personal reasons and you have a good estimate of how much money you’ll need, a low-rate personal loan that is not secured by your home could be a better fit.

With possibly few to zero upfront costs and minimal paperwork, a fixed-rate personal loan could be a quick way to access the money you need. Just know that an unsecured loan usually has a higher interest rate than a secured loan.

A personal loan might also be a better alternative to a HELOC if you bought your home recently and don’t have much equity built up yet.

The Takeaway

If you are looking to tap the equity of your home, a HELOC can give you money as needed, up to an approved limit, during a typical 10-year draw period. The rate is usually variable. Sometimes closing costs are waived. It can be an affordable way to get cash to use on anything from a home renovation to college costs.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit brokered by SoFi.

FAQ

What can you use a HELOC for?

It’s up to you what you want to use the cash from a HELOC for. You could use it for a home renovation or addition, or for other expenses, such as college costs or a wedding.

How can you find out how much you can borrow?

Lenders typically require 20% equity in your home and then offer up to 90% or even more of your home’s value, minus the amount owed on your mortgage. There are online tools you can use to determine the exact amount, or contact your bank or credit union.

How long do you have to pay back a HELOC?

Typically, home equity lines of credit have 20-year terms. The first 10 years are considered the draw period and the second 10 years are the repayment phase.

How much does a HELOC cost?

When evaluating HELOC offers, check interest rates, the interest-rate cap, closing costs (which may or may not be billed), and other fees to see just how much you would be paying.

Can you sell your house if you have a HELOC?

Yes, you can sell a house if you have a HELOC. The home equity line of credit balance will typically be repaid from the proceeds of the sales when you close, along with your mortgage.

Does a HELOC hurt your credit?

A HELOC can hurt your credit score for a short period of time. Applying for a home equity line can temporarily lower your credit score because a hard credit pull is part of the process when you seek funding. This typically takes your score down a bit.

How do you apply for a HELOC?

First, you’ll shop around and collect a few offers. Once you select the one that suits you best, applying for a HELOC involves sharing much of the same information as you did when you applied for a mortgage. You need to pull together information on your income and assets. You will also need documentation of your home’s value and possibly an appraisal.

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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Buying an investment property while living in a rental, sometimes referred to as “rentvesting,” can be a compelling and financially sound plan. An investment property that you can rent to others offers clear advantages — it can generate cash flow, let you build equity, and benefit you and your family for years to come.

Investment property options may include a vacation home, a multi-family home, a single-family home, or a condo that you will rent to others. If you are informed and manage a rental property wisely, it may produce a strong enough income for the unit to pay for itself.

But you need to contemplate a few disadvantages of this concept to successfully make the dream come true. Here, learn what needs to happen if you’re planning to buy an investment property while continuing to live in a rental.

What Is Rentvesting?

The idea is about buying an investment property to rent to tenants while you continue to rent where you are (or, say, live with a significant other, or with your family). The rental income you earn can help you to pay your own rent, but it will also be necessary to cover the costs of owning your property.

Why Do It?

When you own a property, you have potential to achieve capital growth — your investment can increase in value as time passes. Maybe you’re not ready to settle down just yet. Or perhaps you don’t have the money to buy where you want to be. Rentvesting might be a way for you to grow your capital, anyway.

Buying an Investment Property

Purchasing an investment or rental property can be similar to buying a regular home. When you’re looking at buying an investment property that you don’t plan to live in, however, you will have to make some special considerations.

If you’ve decided to purchase an investment property and keep living in your current rental, that plan will affect what types of properties you look at, how you will finance the purchase property, and how much down payment you’ll need.

Here’s a quick summary of the difference between owner-occupied and non-owner-occupied rental properties.

Owner-Occupied	Non-Owner-Occupied
Down payment options from 3.5%	Down payment minimum tends to be 15%; some lenders require up to 25%
Lower interest rates by about ½ to ¾ of a basis point	Lower interest rates by about ½ to ¾ of a basis point

Keep in mind, if you buy a house with two to four units, live in one yourself, and rent the others, you may be able to finance the purchase as an owner-occupied property. You’ll qualify for reduced interest rates, lower down payment options, and more favorable loan options.

But you must live on the property and qualify as a first-time homebuyer. Financing a property with an owner-occupied loan without living on the property as this is considered a type of mortgage fraud.

How to Pull Off the Buy

Step 1: Get Preapproved for a Loan

Before you shop, make sure a lender is willing to give you a mortgage. Qualifying as a first-time buyer has positives. You may have a better debt-to-income ratio, as mentioned above. However, you may have a shorter credit history or a smaller down payment to work with. Whatever the case, it’s helpful to get some numbers from your lender to assist with your investment.

Typical requirements for a rental property mortgage:

•   Credit score minimum of 620. Borrowers with scores of 740 and higher tend to receive better rates and terms.

•   Down payment: Borrowers for investment real estate generally have to put down 15-25%.

•   Debt-to-income ratio (DTI): This is the percentage of a borrower’s monthly income that goes toward debt. A 43% DTI is typically the highest ratio a borrower can have to qualify for a mortgage. When buying an investment property, a lender will generally allow you to count up to 75% of your expected rental income toward monthly income in the ratio.

•   Savings: A borrower should have cash available to cover three to six months of mortgage payments, including principal, interest, taxes, and insurance.

Your lender will also take into account what programs you qualify for. Financing options for an investment property are wide, and underwriting standards can be stricter for rental property applicants.

Some may include:

•   FHA

•   VA

•   USDA

•   Conventional

•   Seller financing

Step 2: Find a Property that Meets Your Criteria

Now that you have your budget and parameters set, you’re ready to find a property. You may want to enlist the help of a real estate agent who can serve as your first-time homebuyer guide, especially since you want to buy an investment property right off the bat.

Your agent can help you write an offer while your lender may be able to help you apply for a mortgage online. You’re well on your way to buying a house to rent at this stage.

Step 3: Think About the Future

If you’re buying an investment property, it shouldn’t be with only a short-term plan. Consider how this property might fit into your life in the long run. If you plan to get married and/or have kids, for example, you may want to look for a property that will suit you later. If you think other family members may need to move in with you down the road, room for them might be one of your criteria.

Step 4: Consider the Costs

Buying an investment property probably means carrying a mortgage, paying interest, and covering utilities and maintenance on the property. Home insurance is necessary and different plans apply depending on the property, so make sure you get covered. As an investor, you must also consider potential property management fees, periods of vacancy, and possible tax implications. Make certain you can afford these costs and still pay your own rent.

Step 5: Start Your Rental Business

Be sure to check local ordinances and business requirements for becoming a landlord. If you’ve got a plan and do your research, you may achieve success. Just don’t believe what you may see on TV, which makes owning a rental property look easy. Landlording is a tough job, and there’s a lot you need to know about the business before you start. Buying a house while renting is an endeavor that takes time and effort.

What to Know As a New Landlord

Unlike what you may have heard or imagined, becoming a landlord can be anything but light work. You’ll also want to research all you can and put proper systems in place. Here’s a little of what you can expect to encounter as a new landlord.

•   Housing laws can make or break you. Are short-term rentals allowed (if that’s what you’re planning)? What rights does your tenant have? If you need to evict a tenant, what does the process look like? Will you benefit by putting your property in an LLC? Always research and understand local housing laws.

There’s a lot to navigate, and you may want to consider hiring a property management company that specializes in this.

•   Determine how much to charge for rent. You’ll want to look at what other properties in the area are charging for rent and position yourself competitively. Also, consider what other landlords are allowing and charging when it comes to pets.

•   Prescreening is key. The reliability of your tenant is so important. It’s incredibly stressful when you’re not paid rent. Don’t rent to someone who “feels” like they would be a good tenant. Do your due diligence. Check credit and their background, and call references.

•   Create a plan for home maintenance, repairs, and other issues. If you’re hiring a property management company, plan for the expense. If you’re doing it yourself, make a list of contacts to call for the different issues that come up (electrical, plumbing, locks, handyman, etc).

•   Have procedures in place for unit turnover. It’s an incredibly intense time when a tenant leaves and another needs to move in. How are you going to handle inspections? Cleaning? Deposits? You will need a system for logging such events and being prepared for changing tenants.

Recommended: Fixed-Rate vs. Adjustable-Rate Mortgages

The Takeaway

While landlording has a lot of responsibilities and risk, there can also be a lot of reward. If you’re really interested in buying a house while renting, you’ll find a way to make it work.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

How much profit should you make on a rental property?

There’s no easy answer for how much profit you should make on a rental property. Some investors buy property for the appreciation alone. There are also a number of methods for determining how much profit investors want to make on an investment property, such as cash flow, the 1% rule, gross rent multiplier, cash on cash return, cap rate, or internal rate of return. Those can help provide guidelines.

Is it better to buy an investment property and live in it?

Possibly. If you live in your investment property, you can qualify for owner-occupied financing, which means lower down payments and better interest rates. But it also depends on your plans. If you want to renovate an investment property, living in it during renovations could be challenging.

Is rental property a good investment in 2025?

Rental demand is strong in 2025, but buying property is more dependent on your individual situation rather than market conditions.

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SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This article is not intended to be legal advice. Please consult an attorney for advice.

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Borrowing against home equity can put cash in your hands when needed. But how soon can you pull equity out of your home after purchasing it?

You might be surprised to learn that there’s no minimum waiting period to access your home equity. You’ll need to meet a lender’s other conditions and requirements to qualify for a loan against your equity, but you can decide when it makes sense to borrow against your home.

What Is Home Equity?

How is home equity explained? Equity is the difference between your home’s value and the remaining amount due on the mortgage. In simpler terms, equity represents the portion of the home that you own.

Home equity accumulates as your mortgage balance goes down and your property’s value goes up. As of March 2024, the average equity value among 48 million U.S. homeowners with mortgages was $206,000, according to the ICE Mortgage Monitor.

It’s possible to have negative equity in a home. That scenario can occur when you owe more on the mortgage than the home is worth. This is also referred to as being upside down or underwater on the mortgage. That’s important to know if you’re calculating how home equity counts in your net worth.

Ways to Access Home Equity

There are several options for borrowing against your equity. The most common are a home equity, a home equity line of credit, and a cash-out refinance.

Home Equity Loan

A home equity loan allows you to withdraw your equity in a lump sum. Home equity loans typically have fixed interest rates and your repayment term may last up to 30 years. A home equity loan is a type of second mortgage that doesn’t affect the terms of the loan you took out to purchase the property. Your home serves as collateral for the loan. If you default on the payments, the lender could initiate a foreclosure proceeding against you.

Home equity loans offer flexibility since you use the money any way you like. Some of the most common uses for home equity loans include:

•   Home repairs and maintenance

•   Home improvements

•   Debt consolidation

•   Medical bills

•   Large purchases

Interest on a home equity loan may be tax-deductible if the proceeds are used to “buy, build, or substantially improve the residence,” according to IRS tax rules. This rule applies through the end of 2025.

Home Equity Line of Credit

A home equity line of credit (HELOC) is a revolving line of credit that you can draw against as needed. HELOCs tend to have variable interest rates, though some lenders offer a fixed-rate option.4 When you take out a HELOC, you have a draw period in which you can access your line of credit and a repayment period when you pay it back. You pay interest only on the portion of your credit line that you use.

HELOCs can be used for the same purposes as a home equity loan. A HELOC may offer a lower interest rate than a home equity loan, depending on the overall rate environment. However, your payment isn’t always predictable if you have a variable interest rate.

Cash-Out Refinance

Cash-out refinancing replaces your existing mortgage loan with a new one while allowing you to withdraw some of your equity in cash at closing. A cash-out refinance loan isn’t a second mortgage; it takes the place of your original purchase loan. The balance due is higher to account for the amount of equity you withdraw in cash.

A cash-out refinance loan may have a fixed rate or an adjustable rate. Fixed-rate loans typically have repayment terms extending from 10 to 30 years. If you choose an adjustable-rate mortgage (ARM), you might be able to select a 3/1, 5/1, 7/1, or 10/1 ARM.

The first number represents how long you have to enjoy a fixed rate on the loan; the second number is how often the rate adjusts on an annual basis. So, a 10/1 ARM would have a fixed rate for the first 10 years. Then the rate would either increase or decrease once a year annually for the remainder of the loan term.

Requirements to Tap Home Equity

Qualification requirements for a home equity loan, HELOC, or cash-out refinance loan vary by lender. In most instances, you’ll need to have:

•   A credit score of 660 or better

•   At least 20% equity, though some lenders may go as low as 15%

•   A debt-to-income (DTI) ratio below 43%

Essentially, lenders want to make sure that you have sufficient income to make the payments on a home equity loan and that you’re likely to pay on time.

Lenders use your combined loan-to-value (CLTV) ratio to measure your equity. Your loan-to-value (LTV) ratio measures your home’s mortgage value against the property’s appraised value. The current loan balance divided by the appraised value equals your LTV.8 Combined LTV uses the balance of all loans, including first and second mortgages, to measure equity. This number can tell you how much of your equity you can borrow. Most lenders look for a CLTV in the 80% to 85% range, though it’s possible to find lenders that allow 100% financing.

Recommended: Understanding Mortgage Basics

Factors That Impact Timing

How soon can you get a home equity loan? Technically, right away. But the more important question to ask is whether it makes sense to access your equity sooner or later.

If you’ve just purchased a home, you may not have much equity built up yet. You may need to wait a few months for some equity to build up before borrowing against it. Your choice of lender could also make a difference. If a lender requires a home equity waiting period, you might have to wait until it ends to borrow.

Here are some questions to ask when deciding if the time is right to withdraw equity:

•   What will you use the money for?

•   How much do you need to borrow?

•   Which borrowing option makes the most sense?

•   How much can you afford in additional monthly mortgage payments?

Risks of Borrowing Too Soon

Just because you can get a home equity loan or HELOC right away doesn’t mean you should. There are some risk factors to consider if you’re thinking about an equity withdrawal.

•   Having less equity in the home can mean a higher LTV, which could make it harder to qualify.

•   Should your home’s value drop after borrowing, you could end up underwater on the mortgage.

•   If you only recently bought the home, you may not have a firm idea of your maintenance and utility costs, which could make it difficult to estimate how much you can afford in additional mortgage payments.

•   Your credit score may need time to recover so you can qualify for the best rates if you just signed off on a purchase mortgage loan.

Using a home equity loan or HELOC calculator can help you estimate what your payments might be. You can then add that to your existing mortgage payment to get an idea of what you’ll pay overall and what’s affordable for your budget.

Alternative Options

If you need to borrow money for home repairs, home improvements, or any other purpose, your equity isn’t the only option. You might consider these alternatives instead.

•   Personal loan. A personal loan allows you to borrow a lump sum and repay it with interest over time. Personal loans are typically unsecured, meaning you don’t need collateral and your home isn’t at risk if you’re unable to pay for any reason.

•   Credit card. Credit cards can be a convenient way to pay for large purchases, home improvements, or emergency expenses. Choosing a card with a 0% introductory APR on purchases can give you time to pay them off interest-free.

•   401(k) loan. If you have a retirement plan at work, you might be able to borrow against it. However, that’s usually not ideal since any money you take out won’t benefit from compounding interest, which could shortchange your retirement.

•   Home equity conversion mortgage (HECM). Eligible seniors 62 and older can get a home equity conversion mortgage to withdraw equity. You can also use an HECM for purchase loan to buy a home. A home equity conversion mortgage requires no payments as long as the homeowner lives in the property, with the balance due when they sell the home or die. Compare an HECM vs. reverse mortgage to see if you’re eligible.

You might also ask friends and family for a loan or sell things you don’t need to raise funds. Taking on a side hustle or part-time job could also bring in extra income so you don’t need to borrow.

Recommended: Reverse Mortgage Interest Rates

The Takeaway

Withdrawing equity from your home can give you access to cash when you need it. In addition to getting the timing right, it’s also important to shop around and find your ideal lender. Comparing rates, terms, credit score requirements, and CLTV requirements can help you find the best loan for your needs.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit brokered by SoFi.

FAQ

How long after purchasing a home can you pull out equity?

There’s generally no set period for how soon you can take equity out of your home after purchasing it. Your ability to borrow can depend on your credit scores, debt-to-income ratio, and how much equity you’ve accumulated in the home.

Are there fees to tap home equity?

Home equity loans, HELOCs, and cash-out refinance loans can all have closing costs just like a purchase loan. Some of the fees you’ll pay can include appraisal fees, inspection fees if an inspection is required, attorney’s fees, and recording fees. You’ll need to pay certain fees out of pocket but your lender may allow you to roll other closing costs into the loan.

How fast can I get a home equity loan?

It’s possible to get a home equity loan as soon as you purchase your home. You’ll need to meet a lender’s minimum requirements to qualify for home equity financing. Getting approved may be challenging if you have a low credit score or only a small amount of equity in the home.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

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Real estate crowdfunding allows investors to pool funds together to invest in property. Crowdfunding has become a popular way to invest in real estate, and gain exposure to an alternative asset class without owning property directly.

Adding real estate to a portfolio can increase diversification while creating a potential buffer against inflation. Real estate crowdfunding platforms make it possible to invest in commercial and residential properties online, with potentially low barriers to entry. But accredited and nonaccredited investors (retail investors) are subject to different rules.

How Real Estate Crowdfunding Works

Real estate crowdfunding platforms seek out investment opportunities and vet them before making them available to investors. The platform then enables multiple investors to fund property investments at lower amounts than the actual property would cost. The minimum investment varies by platform, and might range from a few hundred dollars to upwards of $5,000.

Real estate investors then gain a proportional share of the profits. Depending on the nature of the investment, investors may see interest payments, rental income, or dividends. If a property is sold or assets are otherwise liquidated, investors could also see a profit.

Regulation crowdfunding makes real estate crowdfunding possible, as entities can raise capital from investors without registering with the SEC, as long as they offer or sell less than $5 million in securities.

Real Estate Crowdfunding Examples

Investors can join a real estate crowdfunding marketplace and browse investment options, which may include:

•   Individual residential properties

•   Retail space

•   Office buildings

•   Warehouses and storage facilities

•   Multifamily housing

•   Real estate investment trusts (REITs)

•   Real estate funds

Rather than concentrating capital in a single piece of property, real estate crowdfunding allows investors to distribute their capital among different types of properties. If you’re interested in how to invest in real estate in a hands-off way, crowdfunding can help you do it.

Crowdfunding Explained

What is crowdfunding? In simple terms, it’s the act of raising money from a crowd or pool of investors.

Crowdfunding is possible through Title III of the 2012 Jumpstart Our Business Startups (JOBS) Act. The Act’s purpose was to make it easier for small businesses to raise funds following the fallout of the 2008 financial crisis.

The Securities and Exchange Commission (SEC) subsequently adopted a series of rules allowing crowdfunding to be applied to real estate investments.1,2

Recommended: Alternative Investments: Definition, Example, Benefits, & Risks

Crowdfunded Real Estate for Accredited and Nonaccredited Investors

Today, accredited and nonaccredited (retail) investors can invest in crowdfunded real estate, but there are different rules for each.

Accredited Investors

An accredited investor, according to the SEC, is someone who:

•   Has a net worth exceeding $1 million, not including the value of their primary residence, OR

•   Had income exceeding $200,000 annually ($300,000 for married couples) in each of the two prior years and expects the same level of income going forward, OR

•   Holds a Series 7, Series 65, or Series 82 securities license

Investors who meet the qualifications to be accredited in the eyes of the SEC may invest any amount in crowdfunded real estate.

Nonaccredited Investors

Retail investors who don’t meet the criteria for accredited investors may be limited in how much they can invest in any Regulation Crowdfunding offering in any 12-month period. If either your income or net worth is less than $124,000, during any 12-month period you can invest up to $2,500, or 5% of your income or net worth, whichever is greater.

If both your income and net worth are $124,000 or higher, during any 12-month period you can invest up to 10% of your annual income or net worth, whichever is greater (not more than $124,000 total).

Advantages and Disadvantages of Real Estate Crowdfunding

Here’s a closer look at how the potential benefits and drawbacks of this alternative strategy compare.

Pros

Holding crowdfunded real estate in a portfolio can offer potential advantages:

•   Minimum investments may be as low as a few hundred dollars.

•   Crowdfunded property investments may yield above-average returns for investors who are comfortable with a longer holding period and highly illiquid assets.

•   Investors have flexibility in choosing which type of property investments they’d like to fund, based on their goals and risk tolerance.

•   Direct ownership isn’t required, which means there’s no need for investors to get a mortgage, come up with down payment funds, or deal with the headaches of managing a rental property.

•   Nonaccredited investors are not shut out of crowdfunding real estate, thanks to SEC rulemaking, but are subject to other restrictions.

Cons

While there are some attractive features associated with real estate crowdfunding, there are some things investors may want to be wary of:

•   Real estate crowdfunding platforms may charge hefty fees, which can detract from overall investment earnings.

•   Generally speaking, crowdfunded real estate is illiquid since you’re meant to leave your capital in the investment for the duration of the holding period.

•   Taxes on real estate gains can be complicated, as the dividend portion is typically taxed differently than profit from sales of properties. You may want to consult a professional.

•   Returns are not guaranteed, and properties may underperform as market or economic conditions change.

•   Nonaccredited investors are limited in how much they can invest in crowdfunded real estate by SEC regulations (see above).

Real Estate Crowdfunding Platforms

Online platforms allow investors to crowdfund real estate with a relatively low minimum investment amount. A typical minimum investment is $10,000 though some platforms allow investors to get started with $500 or less.

When comparing platforms that crowdfund real estate, it’s helpful to consider:

•   Minimum and maximum investment thresholds

•   Range of investment options

•   Investment holding periods

•   Fees

•   Investment performance

•   Vetting and due diligence

It’s also important to look at whether a platform works with accredited or nonaccredited investors. The best real estate crowdfunding platforms thoroughly vet properties before making them available to investors, have low minimum investment thresholds, and charge minimal fees.

How to Get Started

If you’re interested in real estate crowdfunding you’ll first need to decide how much money you’re comfortable investing. How much of your portfolio you should allocate to real estate investments can depend on:

•   Your age and time horizon for investing

•   Investment goals

•   Risk tolerance

•   Risk capacity, meaning how much risk you need to take to reach your goals

There’s no magic number to aim for. Some investors may be comfortable allocating a larger portion of their portfolio to alternative investments like real estate while others may prefer to limit their allocation to 5% or 10% instead.

Once you’ve got an amount in mind you can move on to researching real estate crowdfunding platforms. Remember to look at whether platforms work with nonaccredited investors if you don’t yet qualify for accredited status.

The Takeaway

Real estate crowdfunding offers an exciting opportunity to expand your portfolio beyond traditional stocks and bonds. You might consider this option alongside REITs, real estate funds, or real estate stocks if you’d like to reap some of the benefits of property investing without having to purchase a rental unit or a fix-and-flip home.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

How would earnings from real estate crowdfunding be taxed?

Owing to the complexity of real estate-related tax rules, you may want to consult a professional. Crowdfunded real estate investments can produce income in the form of dividends or interest, both of which are taxable at the dividend rate. Generally, any profits you clear when exiting would be treated as capital gains, and the holding period determines whether the short- or long-term rate applies.

Would real estate crowdfunding be considered a high-risk investment?

Real estate crowdfunding is risky, as interest rate fluctuations or changing market and economic conditions can affect outcomes. If you’re weighing real estate vs. stocks, remember that the two have little correlation to one another. Holding real estate in a portfolio can help balance risk and provide some protection against market volatility.

What is the difference between an accredited and nonaccredited investor?

An accredited investor satisfies one of three requirements established by the SEC, based on net worth, income, or securities licenses they hold. A nonaccredited investor does not meet these requirements and is generally considered a retail investor. A nonaccredited investor is subject to limits on how they may invest in crowdfunding opportunities.

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