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

Question

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 · Answer

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!

Zach Lemaster · Answer

@Jeff Welgan could likely add some insight here.

I believe it only counts negatively against DTI if you draw while the credit is being pulled. Keep in mind lenders likely do credit checks upfront and right before closing and will question changes.

Jay Hurst · Answer

https://selling-guide.fanniemae.com/sel/b3-6-05/monthly-debt...

Juan Ayala · Answer

Thank you

Doug Smith · Answer

I depends on the type of loan you're going to get as to how we look at the impact of a HELOC on DTI. Since this is an investor forum, investor loans like DSCRs or Bridge Loans for Spec Construction of Flips really don't look at other payments. The HELOC likely won't have any relevance in those situations. For a more conventional type of financing, it really does depend on the lender, but most of the time, we're going to look at the mininum required payment on your most recent statement for that loan or what is reported on the credit report if a statement isn't required by the lender. Having a HELOC might drop the score a wee bit, but I really don't think having it sit there is going to cause you a negative issue. Good luck to you, Juan.

Greg Scott · Answer

My understanding is that the moment the HELOC is created, before any monies are withdrawn, it impacts your DTI. This makes sense because you could draw on it at a moment's notice. But, I'm not in the lending space.

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

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

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