HELOC Rant

12 Replies

So I spent a big chuck of my time last week trying to get home equity line of credit on my 3 properties. Using the rules of thumb that primary is 80% and rental propertyies at 70-75%, I figure I could get over 100k line of credit. For those who are thinking about getting line of credit from conventional bank (like Wellsfargo), here are the things they told me.

Good things first

  • They will bear the costs of closing. Meaning everything from application, appraisaland everything. Very nice.
  • They can waive the maintenance fee which is usually 75/year. Very nice.
  • The rates range from 4-6 percent (depending on the credit score). Amortize over 30 yrs and refi at 10 yrs. If you don’t refi, balloon at 10th yr.

Now the frustrating parts

  • Primary at 80% of value minus balance. If your primary is valued at 400k and loan balance is 280k, you can apply for 400k*0.8-280k =40k line of credit. This is not that bad actually but the credit person on the phone told me that because I frankly told them I plan to use the line of credit to buy rental property. So when they process my application, they factor in mortgage that I will be responsible for from the new property. However, Wellsfargo credit analysis didn't factor in the extra revenue/income I could get from the new property. This omission of rental income blow through the require debt to income ratio and hence the primary HELOC was turned down.
  • For the 2nd and 3rd property application, the 70-75% is actually 60%. So if my rental property is also worth 400k and loan balance is 280k, I can apply for 400k*0.6-280k= (-40k). That’s right, I can’t apply for anything because the equity/value of the home is not enough. Frustration.
  • Say even if the calculation above shows that you have any amount left to apply for line of credit, it has to be above 20k for them to even consider your application. My guess is that since Wellfargo is paying for the closing costs and appraisal, they don’t want to deal with small line of credit.

So, I am back to square one and have to rely on personal saving, personal line of credit (also with Wellsfargo but that line is approved) and other creative financing approach to get more property. If anyone has good experience with other more investor-friendly banks who will at least add in additional rental income from the new property for any ratio calculation, I would love to give them a try. It is comical to me that Wellfargo is willing to give me a sizable personal line of credit backed by me and will not approve home equity line of credit backed also by me and physical house as collateral. Comical. Comical.

I am unsure why they would not include additional rental income if you've already got two years of rental history on your other two units.  (They are including that income at least, aren't they?)

Note - I am assuming you've got two years of rental income history on your tax returns since you indicate enough equity in the properties to want to leverage it back out.  If this is incorrect, I apologize.

I would do a full rent analysis that you can show a banker on the property you want to purchase and then take it to a local credit union along with your two year (plus) history of landlording and sit down with the loan officer rather than do everything online/over the phone.

I didn't realize that HELOCing an investment property was only 60% LTV. Is that standard, or specific to WF do you think? If so, perhaps a flat out refi to 70 or 75% on the rentals would be workable and then a HELOC on the primary.

I got the same story from Wells.  This seems to be standard for them, but they are the only national chain that I think will even CONSIDER equity lines on rental properties.  

Hey Daniel, a couple thoughts that came to mind while reading your post.  

If you know that you would use the money from the HELOC to buy more properties, have you considered just doing a cash out refi instead? You'd get more money since those are usually done at the 70-75% LTV (on investment properties) that you had hoped for. Plus the rate would be fixed and at a lower rate.

You probably already know this but HELOCs have variable rates which are determined by adding a margin to whatever the Prime Rate currently is. So if the margin is 1.875 (which is what Wells Fargo was using last I checked), and the current Prime Rate is 3.25%, then your APR will be 5.125%. This is within the APR range you mentioned, but keep in mind that it could theoretically go much higher if the Prime Rate were to rise to previous levels.

The down side to a cash out refi would be that your closing costs would be higher.  So you'd just have to factor that in and see if it would work for your particular scenario.

Also, regarding them factoring in the anticipated mortgage on the new property, it's probably too late now since they've already processed your application and factored that in, but in the future if you put that the reason for the HELOC is to "have cash reserves" then you won't have this problem. (This suggestion came straight from Wells Fargo.)

Best of luck to you.

Small local banks can typically provide 100% HELOC's on primary residences. I have two.

I use a commercial lender for 80% loan to value for business line of credit on rental properties.  This is obtained from portfolio lenders.

Also, you should tell them you plan to pay off debt with your HELOC not use for a downpayment.

I used TD Bank for 4 Helocs on investment properties, and said it was for home improvement and purchase of a 2nd home (vacation property). After we hit our limit with TD Bank, it took over a year to find another lender, which was a credit union in the state where our rentals are. Both lenders offered about 75% LTV. We also have a Heloc on our primary residence, for about the same amount through another credit union.

Originally posted by @Linda Weygant :

I am unsure why they would not include additional rental income if you've already got two years of rental history on your other two units.  (They are including that income at least, aren't they?)

Note - I am assuming you've got two years of rental income history on your tax returns since you indicate enough equity in the properties to want to leverage it back out.  If this is incorrect, I apologize.

I would do a full rent analysis that you can show a banker on the property you want to purchase and then take it to a local credit union along with your two year (plus) history of landlording and sit down with the loan officer rather than do everything online/over the phone.

I didn't realize that HELOCing an investment property was only 60% LTV. Is that standard, or specific to WF do you think? If so, perhaps a flat out refi to 70 or 75% on the rentals would be workable and then a HELOC on the primary.

 Funny thing. They don't even ask for return. It is only when i pass the initial evaluation then they will start asking for real document. I do have more than 2 years of rental income history but didn't even get that far for them to ask for it. I feel like it was determined by computer algorithms. Well. Their loss. I would have been a good customer and they would have gotten a pretty low risk outstanding loc. moving on. 

Originally posted by @Carter Melvin :

I got the same story from Wells.  This seems to be standard for them, but they are the only national chain that I think will even CONSIDER equity lines on rental properties.  

 True. I went to chase and they don't even offer it. I heard capital one offers it so I might give them a try. 

Originally posted by @Kyle J. :

Hey Daniel, a couple thoughts that came to mind while reading your post.  

If you know that you would use the money from the HELOC to buy more properties, have you considered just doing a cash out refi instead? You'd get more money since those are usually done at the 70-75% LTV (on investment properties) that you had hoped for. Plus the rate would be fixed and at a lower rate.

You probably already know this but HELOCs have variable rates which are determined by adding a margin to whatever the Prime Rate currently is. So if the margin is 1.875 (which is what Wells Fargo was using last I checked), and the current Prime Rate is 3.25%, then your APR will be 5.125%. This is within the APR range you mentioned, but keep in mind that it could theoretically go much higher if the Prime Rate were to rise to previous levels.

The down side to a cash out refi would be that your closing costs would be higher.  So you'd just have to factor that in and see if it would work for your particular scenario.

Also, regarding them factoring in the anticipated mortgage on the new property, it's probably too late now since they've already processed your application and factored that in, but in the future if you put that the reason for the HELOC is to "have cash reserves" then you won't have this problem. (This suggestion came straight from Wells Fargo.)

Best of luck to you.

Thanks Kyle. Yes it is too late. It is comical though. Had I told them I will use the loc to buy a giant trampoline to host a block party, it would have been approved. What the credit analyst would have missed is that if I buy a trampoline, it will double my primary property insurance, and if someone gets hurt, they can sue me and I will lose my house (giant medical bill) because it is under my name, not LLC. And buying a rental property got denied? Who came up with the current rules they use. Comical.

Originally posted by @Kyle J. :

Hey Daniel, a couple thoughts that came to mind while reading your post.  

If you know that you would use the money from the HELOC to buy more properties, have you considered just doing a cash out refi instead? You'd get more money since those are usually done at the 70-75% LTV (on investment properties) that you had hoped for. Plus the rate would be fixed and at a lower rate.

You probably already know this but HELOCs have variable rates which are determined by adding a margin to whatever the Prime Rate currently is. So if the margin is 1.875 (which is what Wells Fargo was using last I checked), and the current Prime Rate is 3.25%, then your APR will be 5.125%. This is within the APR range you mentioned, but keep in mind that it could theoretically go much higher if the Prime Rate were to rise to previous levels.

The down side to a cash out refi would be that your closing costs would be higher.  So you'd just have to factor that in and see if it would work for your particular scenario.

Also, regarding them factoring in the anticipated mortgage on the new property, it's probably too late now since they've already processed your application and factored that in, but in the future if you put that the reason for the HELOC is to "have cash reserves" then you won't have this problem. (This suggestion came straight from Wells Fargo.)

Best of luck to you.

 Good call on the cash out refi. Guess the down side is that I will be paying the interest for the amount I cash out for 30 years instead of paying interest only when I use it. But considering what that additional cash out can generate in extra income, the cash out amount interest will be worth it. 

Originally posted by Oliver T.:

Small local banks can typically provide 100% HELOC's on primary residences. I have two.

I use a commercial lender for 80% loan to value for business line of credit on rental properties.  This is obtained from portfolio lenders.

Also, you should tell them you plan to pay off debt with your HELOC not use for a downpayment.

 I will definitely try that. Calling up all the small banks I can find. 

Originally posted by Aly NA:

I used TD Bank for 4 Helocs on investment properties, and said it was for home improvement and purchase of a 2nd home (vacation property). After we hit our limit with TD Bank, it took over a year to find another lender, which was a credit union in the state where our rentals are. Both lenders offered about 75% LTV. We also have a Heloc on our primary residence, for about the same amount through another credit union.

 Thanks. I may give them a try. 

I bet most people don't know about this. Pentagon CU is pretty awesome. I am a member and plan to talk to them next week about HELOC on my rental property.

Pentagon CU HELOC

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