HELOC or home equity loan on seller financed property?

San Antonio, Texas
Creative Real Estate Financing
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HELOC or home equity loan on seller financed property?

Christopher Oliva
TX · Member since 2016 · 48 posts · 13 votes

Hi Everyone, rookie-ish real estate investor here. I currently own one duplex that was purchased using a traditional mortgage a few years ago, and I've got a goal of buying at least 2 STRs in the next 12 months. Here's my question/situation...

TLDR: Relative is willing to sign deed on inherited house over to me, I'm wondering if I can get HELOC or home equity loan on this house to fund rehab and the purchase of an additional investment property.

Recently a relative inherited a house that needs some work, they don't want to hold on to it and offered to sell it to me. Original plan was to buy it from them at a great price via a loan from a bank with an eye on taking out a HELOC or home equity loan to fund the rehab, but my relative told me a few days ago they'd rather just let me make payments to them directly instead of me having to get a loan. We will sit down, crunch the numbers, and agree on terms that work for both of us (purchase price and monthly payment, they don't want to charge me any interest). My plan is to turn this property into an STR, I've done some due diligence and I'm confident I'd do very well with this as an STR.

My relative will do whatever needs to be done in terms of title/paperwork to make sure I can still get a HELOC or home equity loan, they essentially told me they'd be willing to sign the deed over to me if that's what it takes. I offered to get some legal docs drawn up to make sure they're as protected as they can be, but they insists they don't feel that's necessary. I on the other hand would prefer to have something in writing rather than simply having them sign the deed over to me (or my LLC that I plan to create specifically for this property). For what it's worth, I did explain to them that if I use the house to get a HELOC there's a risk the lender could call/cancel the HELOC.

Given my situation, does it makes sense to get a HELOC or home equity loan to fund the rehab and if so, which of those products would be best to go with in today's market? Also, could I use the HELOC/home equity loan for the rehab AND to buy an additional investment property?

Aside from the HELOC vs home equity loan question, I'd appreciate any insight on getting some legal docs put together to make sure everything is done properly and also to ensure my relative is as protected as they can be.

Thanks in advance!

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Scott E.
Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
4y

You are saying that a relative inherited a house, they are going to sell you the house, and they are going to do owner financing (you pay them directly instead of you having to get a loan).

If this is the case, you need to get paperwork in order that outlines all of this. There should be a purchase contract, a title company should assist with transferring title, and there should be a note that outlines the terms of your loan with your relative.

Once all of that is established, you need to present this paperwork to a mortgage lender when you apply for the HELOC. Your LTV and DTI ratios will be impacted by the informal 1st mortgage that you have with your relative, but it shouldn't kill the deal.

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  • Bryce Richards
    Rental Property Investor · Dallas, TX · Member since 2022 · 8 posts · 4 votes
    4y
    The house will have to be in your name (the recorded title with the government) to get the HELOC, after that, if the numbers work for the bank on the house, that wont be an issue.  If you have a side deal with that family member and they don't have a 1st position lien against it, you can get more capital out of the house... though I would advise them to get a 1st position lien against it, but that's just me.

    Just tell the bank you are doing home improvements to that house, once you have the line of credit... you can do whatever you want with it.  I could go the line of credit route, as it will be easier to access the capital later and you can draw from it whenever you want or keep the balance at $0.
    1Reply
  • Scott E.
    Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
    4y

    You are saying that a relative inherited a house, they are going to sell you the house, and they are going to do owner financing (you pay them directly instead of you having to get a loan).

    If this is the case, you need to get paperwork in order that outlines all of this. There should be a purchase contract, a title company should assist with transferring title, and there should be a note that outlines the terms of your loan with your relative.

    Once all of that is established, you need to present this paperwork to a mortgage lender when you apply for the HELOC. Your LTV and DTI ratios will be impacted by the informal 1st mortgage that you have with your relative, but it shouldn't kill the deal.

    1Reply
  • Christopher Oliva
    OP
    TX · Member since 2016 · 48 posts · 13 votes
    4y

    Thank you both for your input!

    In regards to applying for the HELOC, do you have any insight on if it would it make a difference if the title is in my name vs the name of an LLC?

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  • Bryce Richards
    Rental Property Investor · Dallas, TX · Member since 2022 · 8 posts · 4 votes
    4y
    No issues with an LLC vs your name.  As you sign your name for your LLC.  They will just need to line up the same with the title of the house.

    Thanks
    Bryce
    1Reply
  • Matt Ziegler
    Rental Property Investor · Colorado Springs, CO · Member since 2020 · 433 posts · 284 votes
    4y


    is it possible to borrow the rehab money from the relative that has the house? Or structure the loan to include the rehab costs… that might make things less complicated.

    1Reply
  • Christopher Oliva
    OP
    TX · Member since 2016 · 48 posts · 13 votes
    4y

    @Matt Ziegler That's not a bad idea, I hadn't thought of that. Yes, it definitely is a possibility. Thanks for that input!

    0Reply
  • Matt Ziegler
    Rental Property Investor · Colorado Springs, CO · Member since 2020 · 433 posts · 284 votes
    4y

    Best of luck!

    1Reply
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