Appropriate HELOC usage

5 Replies

I am in the final stages of a HELOC closing. All is approved just need to get the papers signed and sent back. I am also in the middle of my first investment properly closing (waiting on appraisal completion and closing date schedule).

For those who have used the HELOC to buy properties, rehab and refinance them with either a commercial loan or conventional, do you draw the HELOC money and keep it in the accounts for 3 months before use? I ask because it is common for lenders to ask for 3 months or so of banking checking/savings statements. And when they see 100k deposited into the account they start to ask questions. My understanding is banks are not happy when you use a HELOC with a variable rate to put a down payment on an investment property.

What is the correct approach here? 

Thanks in advance.

@Boris Alayev I used to just take all the cash out immediately and dump it in my business account when I was younger...out of fear that the bank may change their mind...and if my money is sitting with them, they have access to it ;) 

Now I just use what I need...we're in the middle of a renovation and resale...as soon as the property sells, I'll repay the cash taken from the HELOC and repeat (1031 is another story)...

I think it's all relative, but I'd be curious to hear how others respond...

One thing to consider is that when a bank sees a HELOC balance on your credit report, regardless of how much you have used and taken out, they will calculate a future payment on worst case when qualifying you for a mortgage. Meaning that they will usually take a 1% monthly payment given the interest rate will vary in the future with most HELOCS. So if you have a potential HELOC showing on your credit report of 50,000 max available but have used only 20,000, most lenders will , on a mortgage application , see that 50,000 potential and use a payment of 1% of that or 500.00 a month. Even though your interest only payment may be currently much lower.

Ask your loan officer ahead of time what you should do. We just used a HELOC to purchase an investment property and our mortgage company didn't care how long it had been in our checking account. I literally transferred the money a week before closing. They knew where the money came from and just calculated the payment into our debt/income ratio.

Originally posted by @Perry Farella :

One thing to consider is that when a bank sees a HELOC balance on your credit report, regardless of how much you have used and taken out, they will calculate a future payment on worst case when qualifying you for a mortgage. Meaning that they will usually take a 1% monthly payment given the interest rate will vary in the future with most HELOCS. So if you have a potential HELOC showing on your credit report of 50,000 max available but have used only 20,000, most lenders will , on a mortgage application , see that 50,000 potential and use a payment of 1% of that or 500.00 a month. Even though your interest only payment may be currently much lower.

@Perry Farella, yes I am aware, the total line of credit you have available to you is considered as part of the qualification process for future loans. Regardless a HELOC is still one of the best ways to leverage a way to finance future deals.

Originally posted by @Jessica G. :

Ask your loan officer ahead of time what you should do. We just used a HELOC to purchase an investment property and our mortgage company didn't care how long it had been in our checking account. I literally transferred the money a week before closing. They knew where the money came from and just calculated the payment into our debt/income ratio.

 @Jessica G, Thanks for sharing your experience. I will ask the funding bank if they have any extra concerns, especially since they will use the total credit line in their calculations.