Applyin for HELOC - can someone please help/clarify some things?

3 Replies

Hey BP long time lurker here! Need some help clearing up some question. I'm looking to get a HELOC to fund a separate addition that I plan to rent out.

I recently applied through a big bank and was declined due to high DTI but I don't think they took my entire financial picture into account...

I'm the owner of the house but my name is not on the mortgage - LTV is 30%, and I'm requesting a HELOC for 10% of the total value. My annual salary is ~10% of the home's total value, I don't have any debt with a 750+ credit score.

My question is, how does the DTI get calculated in my scenario? The bank said my DTI is 80%+ and I have no idea how they came to this figure. According to my calculations I should be at around 40% and that's IF you calculate me as responsible for the mortgage.

Is it common practice to count the original home mortgage towards my DTI even though I'm not on that loan?

Can someone please point me in the right direction? I have everything lined up for the home addition but need to secure funding. 

HELOCs have no Fannie/Freddie specifying how the math is done.

Each HELOC bank makes up their own rules for how they calculate things.

There's a relationship between the rate/terms and how liberal or conservative their calculations are. For example up in my area, there's a bank doing straight up "stated income" for DTI (partying like it's 2004-2008...), but obviously their rate isn't the best, since it's priced according to risk.

Call around. Your go-to LO for the first position mortgage might be able to provide a referral. 

@Antonius Vaughn co-sign @Chris Mason comment with anecdotal experience backing up his post about the inconsistency of banks approach to income calculation when underwriting HELOCs. 

Quite a few years ago I worked for a bank who would regularly decline 50k HELOCs. The bank branch managers would regularly refer those customers to me and I could get them approved for $400,000 cash out mortgages. So one office of the bank stated that the borrower could not qualify for a $200/month interest only payment on a HELOC. The next office over at the same bank told that client they could qualify for a $2500/month principal and interest payment.

Here is the catch.  Actually never mind.  There is no catch.  It made no sense whatsoever. Moral of the story is to check out different banks. Underwriting for HELOCs can be dramatically different from bank to bank.  Throw in self employment or customers with investment property income and the numbers can vary even more.   

Nice thing is that many banks offer low/no closing costs HELOCs with no upfront application fees so you shouldnt feel too much pain if you have to apply with a few banks.