HELOC - what to say when the lender asks what the money is for?

74 Replies

Hi BP community! I'm in the process of applying for a HELOC on my primary residence, which is a condo. My plan is to use the money to purchase a multifamily property, move into one of the units and rent the other unit(s) out. My current primary residence will also become a rental.

I've called several lenders and am weighing out my options... they all ask: "What do you plan to use the money for?" What's the best response to that?

I'm concerned that if I share it's to buy more property, they may see that as a risky endeavor and charge me more for the loan or lower the LTV they'll offer. I can't say it's to pay off debt (I don't have any)... so I was thinking of saying it's for home improvement, but maybe they'll question why I'm asking for a $150k HELOC for home improvement on a condo?

Thanks in advance for your insights & expertise!

@Elizabeth Southall

Many banks will state, borrow HELOC for 2nd home or investment home or something along the lines. In that case you are all clear. Don't lie on your application - that could construe as fraud, and if the bank doesn't offer funds for new purchase they could close on you. I have not seen banks jack up rate or lower DTI for 2nd home purchase.

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Originally posted by @Nick Shri :

@Elizabeth Southall

Many banks will state, borrow HELOC for 2nd home or investment home or something along the lines. In that case you are all clear. Don't lie on your application - that could construe as fraud, and if the bank doesn't offer funds for new purchase they could close on you. I have not seen banks jack up rate or lower DTI for 2nd home purchase.

Thanks, Nick! This is good to know, and I feel much better just being transparent.

Originally posted by @Caroline Gerardo :

Tell the truth. 

 ^^^ Exactly. It is always the best to tell the truth. The only other answers you should ever give are "do I have to answer that" or "none of your business". If the use of planned use of the money falls outside the terms of the loan, it is better to know now.

Originally posted by @Elizabeth Southall :
Originally posted by @Russell Brazil:

Your heloc is likely to be denied if you tell them the purpose is to buy an investment property. 

@Caroline Gerardo @Nick Shri thoughts on this?

I have a HELOC and I told them specifically it was for investment properties. It seems buying investment properties is better than taking a vacation or buying a sports car. Maybe if the loan is specifically geared towards home improvement, they may have an issue. I am sure there are options out there to use for investment purposes.

Not necessarily -- depends on where you go. Remember Wells, Citi and some others have stopped doing HELOC's all together.

You have to disclose what you are using the funds for. Just be honest, so you don't have to worry about anything coming up in the future.

Find a lender who doesn't care. Equity is your money, you should be able to use it as such. 
I have a specialized 1st position Heloc that's tied to a zero balance sweep checking account on my property. I transfer in and out of brokerage accounts, and move money around all over the place. I've locked in my access to equity so that when the market turns, I can start writing checks and putting that "trapped equity" to work. 

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@Elizabeth Southall

I recently took three HELOCs on three different properties with PenFed and closed at the same time. I told them it was for home improvement and they didn’t asked anything else. I highly recommend maximizing on the HELOCs, this is like having cash and you only use it if you need it.

@Elizabeth Southall It seems that the banks in the USA and Canada ask the same question, "What do you plan to use the money for?" when you refi / take out equity. What's the best response to that? Whenever I structure my client's refi application, the answer "the funds will be used for investment purposes" pretty much speaks for itself. And this is the truth. And it is acceptable. 

A heloc is an under-utilized financial tool. Most homeowners are happily unaware of this goldmine. All the best. 

@Elizabeth Southall

I am currently in the "appraisal" step of the HELOC process. This is my first HELOC ever and decided to pursue it after watching a couple of YouTube videos. I was kinda caught off guard when they asked me what i was going to use the funds for. I simply told them i was going to use them for home improvements (which i might). I hope to use these funds for a down payment on a second rental property. They didn't ask any further questions after that. BTW, I'm in Texas.

You just need to find a lender that clearly states HELOC for investment properties. Credit unions are sure bet (although not all). Even small banks will be willing to work with you.

Originally posted by @Elizabeth Southall :

@Rodney Menendez thanks for the feedback! I've got an application pending with PenFed, along with a few other lenders... I'm shopping around before I sign on the dotted line. PenFed is offering 90% LTV, so one of the highest I've found so far.

Why have you applied with multiple lenders? That is a good reason for all of them to deny. You should only apply with only one lender. PFCU used to do 95% at one point if I remember correctly.

What exactly are you shopping for?

Originally posted by @Ben Blecker :

@Elizabeth Southall

I’ve bought three houses off of helocs. I was asked every time what I was planning to do and I told them buy investment properties.

What do you mean asked every time? Did you open 3 helocs?

@Nick Shri I did not open multiple HELOCs... I contacted 7-10 lenders to ask about their max LTV and interest rates, then I selected my top 3 and applied to those.

They all told me the interest rates they were quoting were starting rates only. Based on what the lenders told me and my own research here in the BP forum, my understanding is that you need to apply and get your credit checked in order for them to give you firm numbers on what they'll offer you... then you make a decision as to which lender you want to go with. I also understand that multiple credit checks within a short time frame won’t damage your credit score, as they will be aggregated as one. 

@Elizabeth Southall wow a lot of good answers already.  
     charge me more for the loan or lower the LTV they'll offer.

Yup. If you want investment loans they are going to cost more. That is a fact of life. You have to account for those increased costs when evaluating a deal. Certainly you should look for good rates. Keep in mind however that today's rates are dirt cheap historically. Even the highest investor loans are often at rates cheaper than the long term average for homeowner loans.

Soapbox mode

If you lie to the bank you are committing bank fraud. While it could land you in jail it probably would not. However the more important reason not to do it is; that is not the way to be successful. If you think you are going to get ahead by cheating and cutting corners you are wrong. You get ahead in this business by working with other people. No one wants to work with a crook. OK, I'm back off soapbox mode.