Atlanta, GA · Member since 2019 · 45 posts · 34 votes
I own two properties free and clear, with a total value of $750,000. I live in one and rent out the other. I've been turned down for a HELOC by three different lenders (Penfed, US Bank, and Wells Fargo) all because I have a very low debt-to-income ratio. I don't know what to do. I hate thinking about that equity just sitting there, plus I could use a little cash. I'm hesitant to sell the rental, as I use that as rental income. Any advice would be much appreciated.
Investor · Chicago, IL · Member since 2016 · 197 posts · 105 votes
6y
You ever consider doing a cash-out refi on one of them, preferably the one you receive income on since the rent can help pay for the debt service, depending on who you go through you can get anywhere from 70-80% of the value of the property. Also even though you can take out 70-80% you could also take out less if don't want to take out the max.
Rental Property Investor · Navarre, FL · Member since 2019 · 913 posts · 640 votes
6y
@Lisa Sluss Your local realtors will know who to contact for refinance and investment loan purposes. You don't have to sell and you shouldn't have to use a HML.
Rental Property Investor · Rockford, IL · Member since 2018 · 84 posts · 140 votes
6y
@William Goodlett
I agree. A local/regional bank will know the market better and have more options to offer. Banks like Chase, Wells Fargo, etc. are huge but not flexible. They have too many controls in place to “protect” the large corporation.
Rental Property Investor · Tennessee and Georgia · Member since 2016 · 21 posts · 8 votes
6y
Lisa, what a great problem to have.
We struggled with similar situations in the past. I recommend doing a hard-money cash out refinance with a reputable lender. I am happy to share mine with you if you'd like. Hard money lenders typically don't look for your debt/income ratio but focus on your plan, credit score, and experience. Hard money looks scary at first, but once you understand it, it is a GAME CHANGER. I am happy to help. If you have any follow up questions, DM me!
Real Estate Broker · Tampa, FL · Member since 2016 · 84 posts · 24 votes
6y
@Lisa Sluss low debt to income ratio is a good thing. Most banks prefer a low DTI. Did they happen to tell you why they weren't willing to accept the low DTI?
Rental Property Investor · CT (connecticut) · Member since 2019 · 6 posts · 3 votes
6y
@Lisa Sluss I inherited a 12-unit multi family with no mortgage. I did a cash out refi which allowed me to buy a few more properties! You should definitely look into doing that. It takes about the same time as a closing.
Accountant · Tacoma, WA · Member since 2019 · 50 posts · 9 votes
6y
Hi @Lisa Sluss!
I’m sorry that you’re being turned down for HELOCs.
I would inquire with local credit unions. They often have different rules than banks. I would also ask the bank what the reason is for the denying of the loan and what would need to happen for you to become qualified. Once you know the reason, you can start working on making your financial situation “banker friendly”, so you can access the equity.
I was turned down this week for a HELOC on a rental property owned free and clear requesting 70%. Their explanation for disqualification was that there was no mortgage on the property. The opposite of common sense. As expensive as a mortgage is, it may be worth while to take out a smaller mortgage that qualifies you within your debt to income and then later try to get a HELOC. Maybe a commercial lender can cross collaterialize both properties to get the cash you need.
I think what you are looking for is generally called 'desk side banking'. The three banks that you mention who turned you down seem to be larger banks with multi branch, multi state, corporate type of structure. I, personally, have found that when you work with smaller, community banks, especially local banks who have local lending committees who meet weekly, your approval rate will skyrocket.
Also, it is important to understand the mentality of the banker - taking a first position up to 75% on your homes which are free and clear - what is known as a 'secured line of credit', with the homes acting as collateral, is an absolute 'no brainer' for any bank who works with investors. They will do an appraisal in advance of granting you a loan, and then you would be able to draw freely from it. But the word 'HELOC' is traditionally associated with 2nd mortgages on primary residence, so I think, in addition to making some relationships with smaller banks in your community, ask them if they grant homeowners secure lines of credit with the homes as collateral in first position.
Remember, there is a thing called a CD Line of Credit - for example, you put 40k in a CD(this is a terrible investment, by the way, but I am doing this for illustration) and then you tell the banker you want a line of credit secured by the CD. The banker gives you a 40k loan for this at a higher interest rate than he or she is paying you on the CD, and then makes money on the yield spread, and if you were to default(God forbid), he TAKES THE CD, CASHES IT, AND PAYS OFF YOUR LINE OF CREDIT. Your 40k is at the bank the whole time, and there is no downside.
My point is - the banker does this ALL DAY LONG - he never says 'no' to this type of deal which is highly favorable for him with no downside risk. And when you secure a house to to a first position secured line of credit, it is even less of a no 'brainer' - maybe he won't give you 75% of the appraised value, maybe just 100k - about 30 pct - until you grow the relationship. But any true investment banker, worth his salt, who understands real estate and works with real estate investors, should have no issue making these loans to you. Yet, if I go to Bank of America today and ask for this, in addition to waiting in line forever, the banker, in all likelihood, would have no idea what I am talking about.
Focus on the smaller investment/desk side banks. If you are unsure of who is lending in this capacity in your local area, contact your local REIA. Hope this helps.
I don’t think you can do a cash-out refi without a mortgage.
You absolutely can. The property is free and clear that does not stop you from a cash out refi . When you do it you will get a mortgage but the tenant is paying it that’s the beauty of it
Real Estate Consultant · Wittenberg, WI · Member since 2014 · 572 posts · 572 votes
6y
@Lisa Sluss
Start Networking with private individuals with cash or retirement accounts and leverage your equity with private lenders instead of banks. I stopped using banks in 2009 and after growing my network of investors I typically have more money than I can utilize.
Rental Property Investor · Tennessee and Georgia · Member since 2016 · 21 posts · 8 votes
6y
Lisa, what a great problem to have.
We struggled with similar situations in the past. I recommend doing a hard-money cash out refinance with a reputable lender. I am happy to share mine with you if you'd like. Hard money lenders typically don't look for your debt/income ratio but focus on your plan, credit score, and experience. Hard money looks scary at first, but once you understand it, it is a GAME CHANGER. I am happy to help. If you have any follow up questions, DM me!
@Joseph Dunphy is spot on.Yes I'm biased towards hard money, but it's a tool for your toolbox. If you learn how to leverage it properly, it really can be a game changer. I would build a relationship with a reputable local hard money lender and some private lenders if you can.
One note of caution when dealing with private lenders... Most are inexperienced at how to lend. If you borrow from them, it is your responsibility to make sure that you protect and take care of them. Also, because most are inexperienced, they may have unrealistic expectations. Make sure you cover everything you can with them. Make sure there are no surprises for them. It would really suck if one freaked out by how the house looks in the middle of a renno and started to freak out on you. It's not the norm, but I do have a few friends who've had that happen to them.
Investor · South Pasadena, CA · Member since 2013 · 23 posts · 12 votes
6y
UPDATE: The Cash Call investor loan went through as promised! My escrow went through just fine. There are certainly lower interest rates out there, but it's better than hard money, 30 year fixed, and if your debt to income ratio or your self-employed status or something else like that is getting in your way, give them a call.