How Does a HELOC on My Primary Residence Affect My DTI?

[Juan Ayala]

I'm considering opening a HELOC on my personal residence to potentially use as capital for future real estate investments. My question is: how will this HELOC impact my debt-to-income (DTI) ratio, both when it's opened and if I start using it?

Specifically, I’d like to understand:

• Does the full HELOC limit count toward my DTI, or just the amount I actually draw?
• How do lenders typically treat HELOCs when evaluating you for future loans?
• Would it be smarter to open the HELOC and let it sit unused until needed, or does even having it open create a DTI concern?

Thanks in advance for any insight or experience you can share!

[Jeff Welgan]

Thanks Zach Lemaster!

Hi Juan, great questions and I have italicized my responses!

1) Does the full HELOC limit count toward my DTI, or just the amount I actually draw?

No, just the amount that you draw and we are only required to use the corresponding IO payment for qualification.

2) How do lenders typically treat HELOCs when evaluating you for future loans? 

If you are not planning on drawing additional funds to close on your new property, we use the current payment that is reporting on credit. If you are planning on drawing additional funds to close on your new property, we will need to add the increase in payment for the new draw to the existing payment reported on credit.

3) Would it be smarter to open the HELOC and let it sit unused until needed, or does even having it open create a DTI concern?

No DTI concern and my recommendation is to open the line as early as possible to avoid closing delays on your future purchase. HELOC’s can take longer to close with some lenders, and it is better to open one in advance with a zero balance than try to close one concurrently with your new purchase.

Pro tips –

• 1) Underwriting guidelines will vary by lender and my responses are the Fannie & Freddie guidelines. Some banks and lenders have their own underwriting overlays that are more restrictive and may use the full draw P&I or IO payment, even if you are only planning on doing a partial draw.

• 2) The HELOC payment will not be a factor in qualifying for DSCR loans.

• 3) To find the best rates and terms on primary residence HELOC's, check with your local credit union and regional banks. Some offer no closing costs, no appraisal fee, and have teaser rates for the first 6-12 months. They will typically lend up to 80% CLTV (combined loan to value) and your rate should be around prime (7.5% currently) if you have excellent credit and you do not exceed their DTI limits.

Hope this helps and reach out if you would like to connect!