FHA vs Conventional + HELOC

3 Replies

Hello BP!!

I'm searching for my first property, and considering FHA loan and 203k. Few days ago I came across bank owned house with price tag of $300k. After research and two visits to house (in Sayville, NY) there is interesting situation developing: this property is in very good condition, and need only some paint and few gallons of clorox, utilities are off, comparable houses in area were sold for #380-420k.

After having conversation with my agent, she suggest not going in to FHA loan, but instead try conventional with 5% down, and getting HELOC after 6 months of occupation. This would allow us to further update house, without expenses of going in to FHA procedures.

Please let me know what are your thoughts about FHA vs CONVENTIONAL + HELOC.

Thank you all.

HELOCS are a portfolio product that a Big Box Bank (bbb) would offer where they would lend their own money as opposed to a MORTGAGE product where they can package, sell off the note and ultimately wipe their hands clean of any future possible risk. This suggests that they are going to hang on to the tradeline on the books and service it themselves. This is a different type of risk ultimately forcing their lending decision to be substantially more conservative. 

Its customary for the bbb to evaluate their collateral in a HELOC application without an actual inspection or appraisal . As opposed to a traditional mortgage application where you must get an actual unbiased appraisal done, during a HELOC transaction, its customary for your bbb to conduct a more cost efficient desktop review of title and market data instead. When making such decisions, especially in the volume that they do, its customary to apply a haircut to value only to protect themselves. This ultimately allows the bbb to arrive at an arbitrary figure which is not surprisingly at least 5 to 10% more conservative than what the market suggests it to be. Its been that way since day 1, im sure people who have had equity lines through the 2000s and even after the great economic recovery can attest to that.

With that being said, assuming you have owned this home for years and are now trying to access some of your hard earned equity through a HELOC, expect the bank to cap you out at 80% of the already conservative value they have given your property in the desktop evaluation to begin with. That means they are allowing you to access UP TO 80% of your equity on a value that's already 5-10% lower than what its really worth. That means you're possibly only able to access 70-75% of what your property value truly is. Don't forget the banks can turn your HELOC privileges on and off if they feel you are over-borrowing without any restrictions. If you don't mind that all you get to borrow is 70% of what your true property value is then i suppose a HELOC isn't the worst way to go.

In your situation, expect the bank to base their lending decision on what you paid for the property 6 months ago. The bbb gets to decide what they feel the home is worth and you cant do anything about it. Don't expect them to give you the benefit of doubt or take the more liberal approach to approving you for an equity line because they have less risky applications now in their pipeline that they need to get to and approve besides yours.

If you're looking for cash, a straight cash out loan is the real way to go. We would appraise your home to be able to get that full current value. That's the only way to go.