HELOC using Appraised ARV - Big Fail for me

18 Replies

Hey BP community,

I have an investment property that I bought cash, and I recently tried to do a HELOC On it with Wells Fargo in order to get my cash back out. As this was my first time trying to do this, I hit a few bumps along the way, and ultimately ended in getting denied.

Here's what happened the first time:

Bought SFH property for 90k cash. Fixed foundation for 5k. I expect pre-repair value to be around 130k, and post repair value to be around 180-200k by looking at comps in the area that several realtor friends provided. A couple months later, I apply for HELOC at 60% LTV on my property. The person selling me on the product tells me (when asked) that LTV is calculated on the value of the home which is determined by an "advanced method that the underwriters will not share with me" and that sometimes an appraisal is ordered from an appraisal company. I asked because I wanted to make sure my credit was not run for no reason and so I didn't waste my time in this process if appraisal turned out less than I expected.

Speed Bump 1 that I need to avoid next time - underwriters came back with value at 90k. Explanation: Sale occurred <12 months ago, so they use the lesser of sale price vs current appraisal value (not post renovations). This would have been great knowledge beforehand. So my asking value of 60% of the 130 I was guessing it was worth (78k) was now reduced to 54k (.6*90). Fine. Next step, make sure I qualified. Credit score is excellent, current debt/current income, like 15%.

Speed Bump 2 and ultimate derail: WF calculated my DTI as my taxed income from 2 years ago (MUCH less than current level), ONLY from the salary I drew at my 9-5. So not only did they not use any of my investment income, even if they had, it would have been the levels I achieved 2 years prior. They then took this 2 years old limited income figure, and put my CURRENT debts over it. When calculated this way, my DTI was blown out of the water at like 45%.

All in all, I learned a lot of what to ask for next time when considering the terms of the HELOC I want/need. In retrospect 60% LTV is low, I need my LTV to be based off ARV (preferably post-repair for most value), and maybe I'm wrong about this, but I think DTI should be calculated as Current Debt/Current Income.

Thanks in advance!!

You need to call a small bank and talk to someone in the commercial lending department. They will offer you a mortgage based on the current value at about 75-80%LTV, but there will be a balloon due after five years and you will need to refi.

Listen to the podcast with Jimmy Moncrief about commercial loans.

Your DTI will be based off your last 2 years tax returns, with verification you are currently making at least that much. This is how it's done. As to Value, it will certainly be as in it's current condition, and most require 12 mo.s, some are 6 mo.s, before they use current value verses purchase price and renovations. As for value they will their in house AVM (Automated Valuation Model) which works similar to Zillow/trulia. If you don't like this value, you can pay for an appraisal.

Originally posted by @Wayne Brooks :

Your DTI will be based off your last 2 years tax returns, with verification you are currently making at least that much. This is how it's done. As to Value, it will certainly be as in it's current condition, and most require 12 mo.s, some are 6 mo.s, before they use current value verses purchase price and renovations. As for value they will their in house AVM (Automated Valuation Model) which works similar to Zillow/trulia. If you don't like this value, you can pay for an appraisal.

Thanks for your responses!

So no matter what they will generally use my income level from 2 years ago as the max?

Separate question, what about the fact that wells would only recognize the salary from my 9-5 and not my total taxable income from the tax return? Is that standard practice? I would think, as many investors work for themselves and not for a salaried position in a separate company, that that would create problems for many of us if most lenders did it that way.

They probably consider the RE income like self employment income, they need to see two years to establish stability.  Is you RE income rental income from properties, or flipping/wholesaling?  To clarify, they're not looking at your income "from 2 years ago", it's the average of the last 2 years.  Here soon, you'll 2014 income to count.

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You can get a loan on a property after 6 months for market value, before 6 months is only purchase price and or repairs. Alot of lenders give different information.

Originally posted by @Wayne Brooks :

They probably consider the RE income like self employment income, they need to see two years to establish stability.  Is you RE income rental income from properties, or flipping/wholesaling?  To clarify, they're not looking at your income "from 2 years ago", it's the average of the last 2 years.  Here soon, you'll 2014 income to count.

Thanks! That makes sense. So when my 2014 income comes in, they should be looking at fully taxable reported income from each year, and then averaging?

Unfortunately when I tried to speak with the rep that was assigned to me, she had no idea what she was talking about and couldn't really answer any of my questions - and pretty much never let me speak to the underwriters who could actually give clarification. Extremely frustrating waste of time for me; especially to come away with not much knowledge about exactly what had happened or how things were calculated so as to avoid in the future.

I appreciate your input.

Thanks everyone

Originally posted by @Dan G. :

You can get a loan on a property after 6 months for market value, before 6 months is only purchase price and or repairs. Alot of lenders give different information.

Thanks a lot Dan. I am coming to realize that 6-12 months can be pretty standard. How do you go about having them factor in the +repairs? I assume this can only be done when the repairs have already been made? Do you have to provide all documentation of $ spent on the repairs? And then they just add that to the sales price, dollar for dollar? What if you do some of the work by yourself to keep labor costs down? I assume that would be unrecognized since no money was spent on it?

I unfortunately cant elaborate on the under 6 month scenario. I called after owning the property for 6 months. Also, I should add it was on a primary residence

This is a good read for me as I'm in a similar situation. Best of luck to you and make sure to keep us posted as to what you end up doing!

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You are right on a HELOC they are not looking at the appraised value...unless you own it for more than 1 year...in some cases maybe 6 month.

Sorry everyone, I wasn't aware of the rules on posting requesting for specific lender info being not allowed in this section. In order to avoid any more issues, let us refrain from posting lender-specific recommendations. As long as no lender names are dropped in this thread though we should be fine.

That being said, what are the best terms you guys have gotten on HELOCs or HEL's on investment properties in terms of LTV, Seasoning period, and Before vs After-repair ARV?

I know a couple HML's that will do based their LTV on after-repair ARV, before the repairs are made. But they are the only ones I've seen do it that way. Has anyone seen this type of method on a HEL or HELOC?

Why can't we mention which banks to deal with? Is this something new? We used to do it all the time.

Requests for specific lenders must be made in the Marketplace.  That's not new.

Another question - has anyone has much luck with HELOCS? From most of my calls today everyone wants to offer HEL's but not so much on the HELOC side? Seems to me that the HELOC would be the best bet since i'm only paying the borrowed funds off when I'm actually using them versus every day whether I'm using them or not. I know that HELOC's work differently and can have balloon payments towards the end or turn into amortized payments at the end but I'm just curious why I haven't talked to more credit unions willing to offer these.

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