Does having a heloc limit the amount on a conventional loan

Question

If we might normally qualify for a conventional loan for 500k. However, we have a heloc for 100k, does that mean the banks will limit our loan to 400k?

Kevin Romines · Answer

The reason someone might take out a HELOC at the time of a purchase is primarily to avoid mortgage insurance. Meaning you can avoid mortgage insurance if your 1st mortgage is no more than 80% LTV. So the limitation of the max. amount that the HELOC can be is the maximum CLTV that the 1st mortgage allows. If the 1st mortgage is a max. of 95% CLTV and the 1st will be at 80% LTV, then the maximum the HELOC can be is 15% of the purchase price. 80% 1st + 15% HELOC CLTV is 95% the borrower brings in 5% down and avoids mortgage insurance on the loans. However, there is no free lunch here, the 1st will be aware of the HELOC in 2nd position and you will have a pricing hit or a little higher rate due to the additional risk of the HELOC.

You will also be subject to how the lender views the debt of the HELOC. Some lenders only count the payment that is showing on the credit report based on the balance reported. Other lenders will count the full amount of the credit line as if it is pulled out and being used and the associated payment is if all funds are out. In this case, being a purchase, you most likely have the full amount pulled out, so they are hitting your DTI with the maximum payment.

I hope this helps?

Scott E. · Answer

A HELOC will impact the CLTV (combined loan to value). It will also impact your DTI (debt to income ratio).

Andrew Garcia · Answer

@Emily Wilson, the payment will be based on the reporting payment. If you have not used any of it, then there will not be a payment reporting and thus will not impact your DTI.

Emily Wilson · Answer

With a heloc, you have the ability to access money that you may or may not have withdrawn.  So, if I have access to 100K, but I haven't used any of it, how does that impact my DTI?

Andrew Garcia · Answer

@Emily Wilson, in that case, the HELOC will limit your maximum pre-approval amount but that does mean it will limit it by $100k.

The maximum pre-approval amount is determined by two things.

1. Assets. You need to have enough money for a down payment and closing costs.

2. Debt-to-income (DTI) ratio. This is exactly what it sounds like. It is your monthly debt liabilities + your proposed monthly mortgage payment divided by your gross monthly income.

The HELOC will affect your DTI ratio and thus reduce your maximum approval amount.

You should talk to a lender so that you can get pre-approved. Please let me know if I can be of assistance.

Andrew Garcia · Answer

Hi @Emily Wilson, are you looking to purchase or refinance? The answer is different depending on which one.

Does having a heloc limit the amount on a conventional loan

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