Good morning BP,
I have a question. When potential lenders are looking at your assets and your reserves, are lines of credit considered? Do they only count liquid cash or will they also count lines of credit. This person has an almost equal amount of both. For example he has $15,000 cash and a $15,000 line of credit.
He has a 700 credit score and his total estimated cash to close on the property he is looking at is about $10,500. He wants to then use the $15000 line of credit to front the repairs, then get reimbursement from the draw inspections. The remaining cash of $4500 will cover the 6 months of interest payments on the loan. His exit strategy is to rehab and flip. Since this scenario will almost deplete his cash, is that bad. Should he save more cash up before jumping on his first deal.
Any thoughts?? The house is in a decent area and renovated homes are selling in 90 days or less consistently. Based on the area, the property itself, the low level of repairs needed and a solid ARV with lots of recent comps, I advised him that it was a good first deal. Interested to see what others thoughts are on this, being that it would tie up the bulk of his cash. He would still have the line of credit if he needed it.
The house is $29,000 and needs about $22,000 of repairs. ARV is a strong $90,000.
Assuming the estimates are all pretty solid and based in reality, I think the plan is pretty decent. If the numbers already have a built-in fudge factor to account for going over budget or extra surprises, then I see no issue with the cash/credit line balances.
In my experience, lenders will consider any available lines of credit as in use already for your DTI calc. They will include the $15K in their debt number and add the payment against their income. The house sounds like a good find @Sanedria Potter !
Line of Credit is considered as debt by lenders Even if it is not used till date. If DTI is favorable, it makes sense of using LOC. He would have extra cash in hand as a buffer or for another investment.
Thank you for your thoughts. I appreciate it.
So @Chendra, you suggest keeping the cash and utilizing his LOC if his DTI is good.
Lol. I tried to highlight your name. Still learning BP.
Use LOC as much as possible, cash is king, just reserve them.
What bank is lending on a small loan of 29k? Most in my area do not go below 50k.
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