Repaid HELOC - Does it need to season?

Question

Here's my scenario with hypothetical numbers. I'm in Spokane, WA.

I have a $50K HELOC that is maxed out.  I have a personal line of credit for $50K with a $0 balance.

I can use a HELOC for a down payment on a conventional mortgage, but not the line of credit.

If I transfer the HELOC to the personal line, what are the implications?

The balance on the line is still factored into my DTI, but would I now need to let the HELOC season for two months? Or could that be immediately available for use on a new property.

Thanks a lot for your input.

Scott Ellis · Answer

@Christopher B. & @Katie K., in our case, we used our HELOC and a separate line of credit to pay cash for a triplex.  We fixed it up using a 3rd private loan.  After six months, we did a cashout refinance.  The goal was to refinance and repay the private loan, personal line of credit and HELOC.  However, our appraisal came back way low. We contested the appraisal and got it raised a little (content for a different post), but our cashout did not fully cover paying all three of our loans off. We kept the leftover balance on our HELOC since it had the lowest interest rate and required interest-only payments.

@Katie K., our cash flow covers both the primary mortgage on the triplex as well as the HELOC payments and additional profit for us. Since the appraisal was low, the mortgage couldn't be for the amount we'd hoped, but. . .that meant a lower mortgage payment which freed up additional cashflow to cover our HELOC payment.

Our plan, if needed, is to use the personal line of credit (now sitting at $0) to zero out the HELOC and then turn around to use the HELOC as our verified funds if we need another down payment for a residential mortgage.

Final Advice: Just make sure you have a contingency plan.  Our worst case scenario would be that we'd need to sell the triplex to pay off the HELOC.  If some temporary negative event happened, we have Roth IRA principle funds that we could pull out to make payments on the HELOC in the short term. The "risk" of a HELOC is that you're leveraging your primary house to make investments.  So. . .just make sure you understand that risk and take steps to mitigate it.

Andrew Postell · Answer

@Scott Ellis this sounds like a small "overlay" that a bank may have.  An overlay is a rule that a lender uses that is on top of the normal Fannie/Freddie/FHA loan rules.  There is normally no waiting period to draft out of a HELOC - but I would certainly call the bank to find out.  Banks without overlays would not need your HELOC to be seasoned for 2 months - but we would also not have an issue with the LOC either.  I would certainly check with the bank you are using to see if they have any issue with it.  Hope this helps.

Scott Ellis · Answer

@Allen Fletcher that is a great idea; and keeping that capacity open on our lines would insure his liquidity should he need those funds for something else.

Thanks for the tip!

Allen Fletcher · Answer

@Scott Ellis

"Final Advice: Just make sure you have a contingency plan. Our worst case scenario would be that we'd need to sell the triplex to pay off the HELOC. If some temporary negative event happened, we have Roth IRA principle funds that we could pull out to make payments on the HELOC in the short term. The "risk" of a HELOC is that you're leveraging your primary house to make investments. So. . .just make sure you understand that risk and take steps to mitigate it"

You said in a response earlier that you had a third party loan to complete the rehab on this property. Have you looked into getting a loan to pay off the HELOC from that source? This would keep your LOC and HELOC both at $0 and give your investor a note that they could use to make money. Also having those credit lines at $0 will help you be approved for a better rate on your next mortgage.

Regards,

Allen Fletcher

Katie K. · Answer

@Scott Ellis Thank you for such a thorough explanation of what actions you took and how those actions fit within your greater plan. Noting the exit strategy was helpful too. Best of luck!!

Neil Da Silva · Answer

very interesting thread!

Katie K. · Answer

@Christopher B. I have this same question. People refer to "paying down" the HELOC, but how did they get access a lump sum like that? I'm looking to use a HELOC for a downpayment on my first investment property, about $25k. There's no way I could just "pay it down". But I don't see many people discussing re-payment plans, using the tenants' rent, etc.

Christopher B. · Answer

What will you use to pay back the HELOC?  Will it be long-term debt which the tenant(s) pay, assuming this is buy and hold, a refinance later, or something else.  I ask, because I am looking at purchasing a Small Multifamily property, and the numbers work, but the purchase price may not be less than 70% of the value of the, but instead about 85%.  I don't want to walk away, because again, the numbers work as $100/unit cash flow (4 units), after PITI of re-fied mortgage, $16K or so on HELOC, 5% CapEx, 5% Maintenance, 6% Vacancy, and 10% Property Management.

My one concern with this property is I will pay cash (HELOC on primary residence), and want to BRRRR out of it, with a 70% LTV cash-out refinance. However, based on my calculations, I'll be leaving about $16K in the deal.  I would like to get that $16K out, so I can leverage it with the next deal and the next.  I also don't want the long-term additional debt on my primary residence, though the equity I have on my primary residence would cover it, if I sold it.

Scott Ellis · Answer

A followup based on how this played out.  My bank (Umpqua Bank) did not require the HELOC to season. As soon as it was payed down, I could turn around and use it again; even though the money to pay it down came as a large sum from an outside account.

Though, as things turned out, I ended up getting a commercial loan instead, so the lender was not picky about where the source of funds came from.

Ivory Hayes · Answer

That makes total sense in applying the DTI towards the usage of the 50k in each different scenario. So in essence, if a debt does indeed affect your DTI (which it most certainly will) it probably affects your credit in regards to the percentage of usage, of that debt. It's only my assumption but it makes more sense to assume so than not to.

Thanks again for the help @Scott Ellis.

Happy Investing...

Repaid HELOC - Does it need to season?

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