High DTI Ratio with HELOC

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High DTI Ratio with HELOC

Devan W.
Investor · Englewood, CO · Member since 2017 · 34 posts · 14 votes

Hi BP! Recently, my wife & I decided to get a HELOC on our rental property in hopes of buying more rentals. Our lender said $210k was the max we could qualify for considering the LTV and our DTI (now around 53% with HELOC).

So now we have two 15-yr mortgages (primary & rental) plus a HELOC counting towards our DTI. We both have excellent credit and no other debt besides our mortgages. Even though the HELOC has a zero balance, it still counts against our DTI as if we are utilizing the entire amount. Is financing another rental even an option for us at this point? Are we limited to buying a property with all cash from the HELOC? Are there any lenders that do not take DTI into consideration? Our plan was to buy several rentals by only putting 20-25% down but that doesn't seem like it's going to be an option now.

Also, the deals don't look as good when we factor in the 6.5% variable interest rate from our HELOC. Basically, a $100k deal would cost us $542/month in interest. Seems like it would be hard to cash-flow without using leverage. Do we just need to look for better deals?! 

Any suggestions? Thanks!

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Ramon Flores
Rental Property Investor · Los Angeles, CA · Member since 2016 · 172 posts · 122 votes
7y

@Devan W. Hi Devan, you are correct that a lot of lenders will not grant you a conventional loan since your DTI is too high. However, there are lenders that care more about the deal itself than your DTI. You can get a hard money loan if the deal is good and only put down a small percentage, then refi out to pay the loan back. You will also have money in your HELOC as a backup in case anything goes wrong.

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  • Ramon Flores
    Rental Property Investor · Los Angeles, CA · Member since 2016 · 172 posts · 122 votes
    7y

    @Devan W. Hi Devan, you are correct that a lot of lenders will not grant you a conventional loan since your DTI is too high. However, there are lenders that care more about the deal itself than your DTI. You can get a hard money loan if the deal is good and only put down a small percentage, then refi out to pay the loan back. You will also have money in your HELOC as a backup in case anything goes wrong.

    3Reply
  • Joel Thompson
    Investor · Kirkland, WA · Member since 2017 · 121 posts · 53 votes
    7y

    @Ramon Flores makes a good point, hard money could be a good option. Instead of buying properties with your HELOC, you could use that as the source for your down payment and maybe self fund any rehab costs. When you keep in mind that hard money might be 10-12%, the 6.5% rate looks much better.

    The HELOC opens up new options for you, and will be a great tool as long as you use it wisely.

    2Reply
  • Devan W.
    OP
    Investor · Englewood, CO · Member since 2017 · 34 posts · 14 votes
    7y

    @Joel Thompson @Ramon Flores Thank you both for the feedback. Using hard money is a little intimidating for a newbie like me but would definitely make sense if the deal is good enough. We are also considering downsizing our primary, pocketing some cash, and getting a 30yr term on our next house. That would definitely help our DTI. It's tough to downsize but we really want to build up our passive income!!

    1Reply
  • Kyle J.
    Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    7y

    Hard money is just a short term solution. So you wouldn’t want to use hard money unless you knew you could refi out of it on the back end. Since you’re already having issues getting financing, you need to get that squared away first. 

    And not all lenders will count a HELOC with a zero balance against your DTI ratio. That's just an overlay that whatever lender that told you that has. Other lenders wouldn't count that against your DTI at all. So I'd call around and talk to other lenders.

    Lastly, there are pros and cons to both 15 yr and 30 yr mortgages. However, you're finding out one of the cons of the 15 yr, which is that the higher monthly payments (compared to the 30 yr) hurt your DTI a little more and you don't have the option to pay less when you want.

    The 30 yr mortgage actually gives you more flexibility because you can make extra payments and pay it off like a 15 yr if you want, but you're not required to so the lower monthly payments don't affect your DTI as much.

    1Reply
  • Brooke Andrea
    New York City, NY · Member since 2017 · 43 posts · 174 votes
    7y

    @Devan W. Can I ask who you used to get your HELOC on a rental? My bank told me they only do HELOCs for primary residences, and it would be hard to find a HELOC for a rental. What was the max you could have gotten if the DTI wasn't an issue (80%)?

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  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    7y

    Oh man. Leaving my 9-5 job and W2 land and never hearing a bank say "DTI" might just be the biggest benefit if being a real estate investor

    2Reply
  • Devan W.
    OP
    Investor · Englewood, CO · Member since 2017 · 34 posts · 14 votes
    7y

    @Kyle J. That's great news that some lenders will take into consideration my zero balance! I can see both sides of it: yes, I can access the HELOC money at anytime but I can also access my full credit card limit at anytime...any they obviously don't count my CC limit towards my DTI.

    The 15yr mortgages were decisions I made several years ago before I discovered BP. I didn’t fully understand that I could potentially make way more money buying additional properties compared to saving 0.5% on my mortgage! Oh well, live and learn! Thanks!

    0Reply
  • Devan W.
    OP
    Investor · Englewood, CO · Member since 2017 · 34 posts · 14 votes
    7y

    @Brooke Andrea I used Pentagon Federal Credit Union (Penfed.org). The process was very easy and doesn't cost anything out of pocket as long as you keep the HELOC open for a minimum of 2 years.

    The max LTV they offer on investment property is 75%. They have great rates too! My HELOC is prime plus 1% and is subject to change quarterly. Good luck!

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  • Devan W.
    OP
    Investor · Englewood, CO · Member since 2017 · 34 posts · 14 votes
    7y

    @Cody L. That’s awesome. Care to share how you got to that point?

    0Reply
  • Jerry Padilla
    Lender · Rochester, NY · Member since 2014 · 3k+ posts · 1k+ votes
    7y

    @Devan W.

    The HELOC shouldn't count against you unless there is a balance and only that payment will count against you.

    Plus purchasing a new investment property - you can count the rental income at a 75% value and this will help get your DTI's to where they need to be.

    1Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Devan W.:

    @Cody L. That’s awesome. Care to share how you got to that point?

     I wrote it on a link, off of my main site, but BP calls it 'self promotion' and wants me to pay to have people read it.  So I'll give you the short story:

    Bought an 8 unit while still had a job.  Did it the normal way.  With savings + loan.  Over a few years, got to about 150 units before my 9-5 job went away (long story there).  At that point, I slammed on the gas and have been aggressively buying/selling/refinancing ever since. 

    I promise what I did wasn't anything that anyone else couldn't do.  I think the only difference is I was very risk tolerant.  I bought and did deals that others would think I'd be crazy to do or structured in a non vanilla way that most don't want to do.  Which I think is why my advise tends to be so much different than what I see on here.  Most replies give the correct 'technical' answer while I'm answering based on what works for me

    2Reply
  • Preston Quinn
    Rental Property Investor · Lynchburg, VA · Member since 2018 · 116 posts · 73 votes
    7y

    @Devan W.

    Would refinancing the 15 year mortgages you already have to 30 year mortgages help your DTI? If so, cash out refi them. Add that to your acquisitions account. Another option would be to start a LLC so you get commercial loans. With my local bank, I was told as long as the mortgage payment is 70% of rental income I can buy as many as I want inside my business and it'll never affect my DTI. in fact, if the payment is less than 70% of the rental income it'll help my DTI because my income will increase on paper.

    I want you to keep in mind, I don’t have any rental properties. I have only flipped til this point. So I could very easily be missing something. If anyone sees that I am missing let me know.

    Good luck.

    0Reply
  • Devan W.
    OP
    Investor · Englewood, CO · Member since 2017 · 34 posts · 14 votes
    7y

    @Cody L. WOW...Congrats man! To casually go from 8 units to 150 in a few years is pretty impressive. Hoping to get there one day. Sounds like traveling the world in your private jet like Grant Cardone might be just around the corner for you!!


    @Preston Quinn Yes, having 30yr mortgages would certainly help. It's hard to stomach a cash-out refi when I only have 6yrs left on my rental @ 3.75% and the interest rate on my primary home is just 2.75%. We are also considering selling our primary so if that happens, I will of course do a 30yr on my new loan.

    Starting a LLC for commercial loans isn't something I've looked into yet but seems like that could be a good option. I'm starting to figure out that finding a good lender is key to moving forward in my situation. Thanks!

    1Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Devan W.:

    @Cody L. WOW...Congrats man! To casually go from 8 units to 150 in a few years is pretty impressive. Hoping to get there one day. Sounds like traveling the world in your private jet like Grant Cardone might be just around the corner for you!!


    @Preston Quinn Yes, having 30yr mortgages would certainly help. It's hard to stomach a cash-out refi when I only have 6yrs left on my rental @ 3.75% and the interest rate on my primary home is just 2.75%. We are also considering selling our primary so if that happens, I will of course do a 30yr on my new loan.

    Starting a LLC for commercial loans isn't something I've looked into yet but seems like that could be a good option. I'm starting to figure out that finding a good lender is key to moving forward in my situation. Thanks!

    Hehe. Private jets are not my style. I could if I wanted to I suppose. I have the house I want, where I want it. We travel and do what we want, when we want to. I’m not into fancy cars but I did get a model S. We have a few vacation homes (that I of corse keep rented when not being used). basically we live low key.

    I’d like to go to 2000, 3000+ units but my wife would just assume I work less. So I hover at 1,500 units and will likely stay around here unless something changes fundamentally in the market 

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