BRRRR question...... using home equity VS hard money

28 Replies

I️ have hard money and a lot of home equity to use for my BRRR strategy. I️ want to know if my home equity line is going to hinder my refi with the debt to equity ratio. I’m torn between using my home equity or hard money. I️ would like to use the home equity for obvious reasons. Your thoughts please :-) :-) :-)

If you use Home Equity, you can pay it off when you refinance so that it won't affect your DTI. It can probably be arranged at escrow to pay off the HELOC directly with the funds coming from the refinance.

This depends on whether you ran your numbers correctly and you have enough to pay off the HELOC from the refinance. Even if you don't pay it off in full, your DTI should be okay if you pay off most of it. I'd recommend running the numbers with a loan officer first before purchasing the property.

One thing it will affect is your credit score, especially if you over-leverage your HELOC. If it drops low enough, it can affect your ability to refinance the property (or at least your interest rates).

Originally posted by @Nghi Le :

If you use Home Equity, you can pay it off when you refinance so that it won't affect your DTI. It can probably be arranged at escrow to pay off the HELOC directly with the funds coming from the refinance.

This depends on whether you ran your numbers correctly and you have enough to pay off the HELOC from the refinance. Even if you don't pay it off in full, your DTI should be okay if you pay off most of it. I'd recommend running the numbers with a loan officer first before purchasing the property.

One thing it will affect is your credit score, especially if you over-leverage your HELOC. If it drops low enough, it can affect your ability to refinance the property (or at least your interest rates).

I don't see any of your points being any different if hard money was used instead of a HELOC, except that with HML, it's even more important to get the numbers correct before you buy! 

Why? Because paying back your HML will be more expensive! Did I miss something?...

@Brent Coombs  

You know, looking back at the original post, I think I read it wrong.  @Adam Mazzochi mentioned debt to equity ratio, and here I was thinking DTI. My entire post was how the HELOC would affect DTI (and credit), which might potentially affect the take-out loan. So my mistake on answering the wrong question :-)

Obviously, there are risks to both sides if you don't run your numbers correctly. I'd actually argue that using hard money might be better in terms of making sure you're running your numbers correctly; the lender would ensure that you're not over-leveraged and they would double-check your numbers, especially ARV.

But having the right numbers and careful planning doesn't equal execution.  The worst place to be in is having a hard money loan when your project is in trouble.

Another thing to keep in mind is that many hard money lenders do not report to credit bureaus unless of course there is a problem with the loan. That may help your DTI should you want to get conventional financing in the future.

Anthony Palmiotto, Lender
732-825-8095
Originally posted by @Anthony Palmiotto :

Another thing to keep in mind is that many hard money lenders do not report to credit bureaus unless of course there is a problem with the loan. That may help your DTI should you want to get conventional financing in the future.

I guess that's what @Nghi Le was referring to when writing "One thing it (a HELOC) will affect is your credit score", with no mention of HML doing the same?

I'm not impressed, if it's true that (many/most?) HML help their borrowers "hide" their debt!...

@Brent Coombs

I don't think they actively try to hide away from reporting credit; it's just not in their business model since they're asset-based lenders.  As long as they cover their downside with the collateral, they're happy.

If you've been in business long enough and file tax returns, that's a way conventional lenders can poke around to figure out your true DTI.

@Anthony Palmiotto

One thing I've always wondered is if HMLs report late interest payments. Or if they report anything to the credit bureaus at all. I mean, once you're in default and are foreclosed, doesn't that automatically show up in your credit report (without having the HML do anything)?

It would be ironic if they don't report late payments because a lot of HMLs ask if you've had late payments, but how would they verify it if other HMLs don't report it?  They'd only see the late ones that are reported on your credit by the conventional lenders.

So if you guys don’t see an issue with DTI using the heloc when you go to REFI I️m guessing the heloc is the way to go. I️ agree with not wanting to be in this longer then necessary with a HML lol. So if you were in my position is heloc the final answer to finance the brrrr ???

By the way did I️ ever say I️ love BiggerPockets???lol

Any cash out after refi will pay off the heloc. I’m looking to pay it off completely or close to it. The goal in the end guys is to be much less then the 25 percent I️ would have to cough up on a turn key investment house so I️ can do it many more times. I️ appreciate all the advise btw people. The purpose of this blog is to learn he better way weather it’s heloc or hml to BR

@Adam Mazzochi Even though you pay off your HELOC, if line is still open on your credit you can take out that money any time from that line of credit so U/W will hit your DTI with full amount which is open unless you close that line of credit.

Harjeet Bhatti, Lender in IL (#230554)
+18479628229
Originally posted by @Adam Mazzochi :

Any cash out after refi will pay off the heloc. I’m looking to pay it off completely or close to it. The goal in the end guys is to be much less then the 25 percent I️ would have to cough up on a turn key investment house so I️ can do it many more times. I️ appreciate all the advise btw people. The purpose of this blog is to learn he better way weather it’s heloc or hml to BR

So, your goal is to be all-in for no more than 70-75% of post-rehab Lender appraisal, right? 

Remember, if you get your sums / execution wrong, you won't get to (quickly) repay all your HELOC back, which means you won't have as much "free" cash to re-use next time. All the best...

Harjeet what would you do. How would you do it then???

Originally posted by @Adam Mazzochi :

Harjeet what would you do. How would you do it then???

I don't think Harjeet was implying that you should do it differently, but was just reminding you that the your whole HELOC amount would be included in your DTI, regardless of drawing on it or not!

Yes that was my original thought which was obvious that’s why I️ started this discussion. It looks like I’m going to have to spend more fees on HML’s for the BR. Are there any other ways to skin this cat???

Seems like I️ was going to get the most heloc out of my properties but the obvious answer is the DTI will be more out of my favor and will hinder my refi,... so I️ will only take out what I️ need so I️ can refi.

Any other options???

Originally posted by @Adam Mazzochi :

Yes that was my original thought which was obvious that's why I️ started this discussion. It looks like I'm going to have to spend more fees on HML's for the BR. Are there any other ways to skin this cat???

Seems like I️ was going to get the most heloc out of my properties but the obvious answer is the DTI will be more out of my favor and will hinder my refi,... so I️ will only take out what I️ need so I️ can refi.

Any other options???

Are you now saying you won't even qualify for a HELOC anyway?

If a HELOC was never an option anyway, are you sure that HML will ignore your DTI ratio?...

I buy using Heloc as cash for projects under 125k. Including purchase and rehab. I use a commercial lender to refinance out, there is no seasoning required. Just a renovated property and a signed lease. They look at the strength of the deal and the ARV. Disclosure: I’m purchasing in the name of my LLC.

Bret I️ do qualify for heloc that’s why I’m discussing it but the refi might not happen when the bank that’s considering the refi sees my open credit heloc line it adds to the total debt so refi might not be an option right???? HML will not be an issue with DTI because they don’t report to the credit agency’s but you then pay high fees points interest etc. am I️ missing anything???

Garret thank you for your input. Do you purchase commercial properties? I’m considering residential houses to brrrrr not commercial so I’m not sure if that will qualify for a commercial lender refi. Also do you pull back your total BR investment??? If so congratulations my friend good for you :-)

Garret one more thing I️ have an S-Corp is this bad??? It’s my construction company too I️ was hoping to not start another Corp. good bad ? WhT do you think???

Originally posted by @Adam Mazzochi :

Bret I️ do qualify for heloc that's why I'm discussing it but the refi might not happen when the bank that's considering the refi sees my open credit heloc line it adds to the total debt so refi might not be an option right???? HML will not be an issue with DTI because they don't report to the credit agency's but you then pay high fees points interest etc. am I️ missing anything???

I guess my thinking is that: each deal is supposed to be so good, that your DTI ratio improves

Let’s say you buy an investment house put in your 25 percent rent it out and claim the income on your taxes will my DTI improve? It’s either this or leaving the equity in the house after I renovate and refi which is the same thing right???

Originally posted by @Adam Mazzochi :

Let's say you buy an investment house put in your 25 percent rent it out and claim the income on your taxes will my DTI improve? It's either this or leaving the equity in the house after I renovate and refi which is the same thing right???

Your DTI doesn't change that much between borrowing 75% of its cost, vs 100% of its cost later, does it? Especially because, your income does increase significantly in the interim, right?

And if "your 25 percent" is already borrowed money, why wouldn't your DTI be improving?

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