Seattle, WA · Member since 2020 · 14 posts · 8 votes
Hi! My primary home is worth about $2M and paid off. I would like to draw $1-1.5M from it to buy a multifamily property with a 1st lien HELOC. The problem is that my income doesn't support a loan of that size and I was told by a loan officer I spoke to that I can use the HELOC to buy an investment property but not a business. Not sure if a commercial property counts as a business but I'm guessing it does.
My question is- are there any other ways to tap into this equity? With my income, I only qualify for a $400K line. My credit is 750+ and I don't want to partner with anyone.
@Sara Simpson, there are a few items that seem to not add up. Typically, the underwriting on a HELOC will be more conservative than a mortgage, so you might be able to qualify for more out of a traditional mortgage than a HELOC. Depending on your needs, it might make sense to talk to the loan officer about a low LTV first mortgage (60% or below) and then a HELOC to bring you up to 80%. I mention this only because if you are not thinking things will come up for another 1-2 years, taking out a mortgage will have fixed monthly payments that you will need to cover until you find an investment property.
Secondly, I have never heard of a HELOC having restrictions on what you can use the money for, but this doesn't mean my experience is all encompassing. I have used my HELOC to buy several flips, but I have issued wires straight to title companies and drawn down the whole line in one check to myself. No calls from any compliance officers asking how it was going to be used.
It is common use for investors to use HELOCs as down payments for investment properties. If you plan to use the HELOC as a cash purchase, you will probably not have any issues. You could get questions from underwriting if you are combining your HELOC as the equity with a loan on the investment property. An underwriter might view that as a 100% financed property and flag it.
Hi, I tend to offer my advice on this topic a lot when it comes to HELOC's. Years ago HELOCs became a popular go to tool for buyers and investors because of the lower rate and interest only options. Aside from that there are not many benefits but you could argue both sides. Keep this in mind right now you have rates around 2.87%-3.25% on a primary cash out refinance based on Friday's pricing. That is based on good credit and LTV factors where terms and condition apply. Just take out max cash and use that cash as a DP and collateral. If you take out a HELOC it is an open end obligation which banks consider risky considering the primary homes LTV/CLTV. a HELOC is like credit card not like cash because the bank can reduce or close the account for multiple reasons at any time. When you buy over 5+ units that is commercial and the lender should be considering all forms of assets income, life insurance value, portfolio (stocks,bonds, etc) land value, cross-collateralize. To try and approve you for Max loan amount and DTI. Right now the 5+ unit MF loans over $1-Million are easier to do and approve with better rates.
Thanks @Jason Wray I would still be subject to my income correct? One thing I was thinking about is buying my first multifamily with $400K and then using the income from the property to beef up my existing income and then draw more out of my house.
I can actually draw more dividend income from my other investments. The bank said they need to see it consistently drawn instead of reinvested for it to count towards my income to qualify for the loan. I was thinking about doing that for a few months to qualify for more. Seems weird but I guess I might have to do that.
@Sara Simpson Hi Sara. @Jason Wray made some good points. I would be really curious about intentions and motivations. I am using a system I call GROWER in my mentoring and it pays a lot of attention to what we call a "BHAG". That comes from Jim Collins book "Good to Great" and means "Big Hairy Audacious Goal". I always suggest to start there and ask why you want to do what you state you aim to do. Based on that folks like Jason to I and others can provide you with our suggestions. Just as an example. If you ere to take the $400K and instead of investing in multifamily properties that re seen as a commercial investment, you could invest in traditional residential properties. With a $400K investment, you can get $1.2million of asset value that could pay you about $3000/month in passive income at the low financing rates that Jason quoted.
You asked about income and that is something that many people use as a term but it is more complex than it looks. If you were to have these $3000/mont as passive income it does not mean it counts the same as income you make form a job. ON the there hand the rental income that is part of the $3000 counts as income for your qualification for future financing.
It would take to long and deep to describe in writing. I think it would be smart to start with GROWER and then decide from there. HELOC is one of the many many options that comes many steps after you have answered all the GROWEWR questions. IF you like to talk about it, let me know and I am happy to discuss indetail and help you understand.
@Axel Meierhoefer. Not sure what the GROWER method is but I can tell you about my goals. I'm trying to use the assets and money I have to build wealth. I want to be an active manager and BRRRR multifamily properties. I don't need cashflow, I would use the cashflow from any properties I buy to improve or build equity in the property.
I believe there will (finally) be some multifamily deals to be had in the next 12-18 months so I want to be ready with cash and financing lined up for when I find a deal.
@Sara Simpson OK, that's interesting. Maybe you can describe how you define wealth. GROWER stands for Goals, Current Reality, Obstacles & Opportunities, Action you Will take, Experiences from taking action, and Results (potentially influencing your goals). It's a cycle that is used to achieve your BHAG
@Sara Simpson, there are a few items that seem to not add up. Typically, the underwriting on a HELOC will be more conservative than a mortgage, so you might be able to qualify for more out of a traditional mortgage than a HELOC. Depending on your needs, it might make sense to talk to the loan officer about a low LTV first mortgage (60% or below) and then a HELOC to bring you up to 80%. I mention this only because if you are not thinking things will come up for another 1-2 years, taking out a mortgage will have fixed monthly payments that you will need to cover until you find an investment property.
Secondly, I have never heard of a HELOC having restrictions on what you can use the money for, but this doesn't mean my experience is all encompassing. I have used my HELOC to buy several flips, but I have issued wires straight to title companies and drawn down the whole line in one check to myself. No calls from any compliance officers asking how it was going to be used.
It is common use for investors to use HELOCs as down payments for investment properties. If you plan to use the HELOC as a cash purchase, you will probably not have any issues. You could get questions from underwriting if you are combining your HELOC as the equity with a loan on the investment property. An underwriter might view that as a 100% financed property and flag it.
@Evan Polaski. Yeah, maybe a traditional mortgage is the way to go. I just don't want to sign up for fixed payments before I find a deal, which is why I like the HELOC. Maybe I'll get approved for a mortgage and close it as soon as I get under contract.
@Jason Wray is it possible for a lender to call a HELOC once drawn (assuming timely interest payments)? I am also looking to use a HELOC for a downpayment on a multifamily. My thinking was a HELOC was preferred since no interest due until I actually use it (in 6 to 12 months) and no closing costs. Also my local bank is offering a initial 12 month rate on the HELOC that is 1.5% lower than a cash out refinancing. Thanks!
HELOCS can be a great option if the rate is low 1.5% IO full term. But you would still need to have the cash drawn out to cover the DP. Some banks/lenders require a cash/reserve seasoning for the DP or the liquid reserves for the monthly P&I required to close. Some portfolio lender may not care but the rate will be higher and the LTV max would be lower on those programs. I am not a big fan of HELOCS just because it's not guaranteed money! Market changes or you have credit discrepancy such as a late payment, high DTI, excessive trade lines (High risk) multiple mortgages and high revolving balances over a certain percent the bank has the right to reduce or close that account. If it is open end and not fully drawn and you in the middle of a project or in the mist of a DP. That can be a deal killer, but cash in the bank is liquid. Keep in mind there are Pro's and Cons.
Secondly, I have never heard of a HELOC having restrictions on what you can use the money for, but this doesn't mean my experience is all encompassing. I have used my HELOC to buy several flips, but I have issued wires straight to title companies and drawn down the whole line in one check to myself. No calls from any compliance officers asking how it was going to be used.
It is common use for investors to use HELOCs as down payments for investment properties. If you plan to use the HELOC as a cash purchase, you will probably not have any issues. You could get questions from underwriting if you are combining your HELOC as the equity with a loan on the investment property. An underwriter might view that as a 100% financed property and flag it.
I agree, I have never heard of a bank asking what the HELOC is being used for. I think you should just go to several banks and ask for the best rate /maximum amount of HELOC you can get on your home. If you get 500-1M in a HELOC, take a small amount out, say 100k and make the monthly payment on it. Leave the rest available until you need it. When your getting close to doing a deal, you can just pull it out and put it into cash.