HELOC denied for improper use of funds

13 Replies

I had applied for a HELOC with WF. My intent was to keep this money available for rehabbing projects (paying hard money lenders points, reserve funds for overages, etc.) Everything was going great and I was approved for $50,000. Then yesterday they told me they were going to reject my application because I told them I wanted the credit because my wife was starting up a home based business and needed that for reserves. I didn't state the nature of the business or anything so that was a true statement. But I thought it might scare them if I specifically stated it was a flipping business.

Before I go back and reapply elsewhere, does anyone have suggestion on stating my intended use of the funds? I can tell them I want to use it to pay off credit card debt but:

1) They know how much debt I have from my credit report. I want to borrow much more than my debt so if they ask why don't I just borrow enough to pay off that debt, I don't want to have to try to stumble and come up with a new explanation.

2) I don't actually want to pay that debt off right now and do not want them to pay it off for me. I don't know if they will or not, I just want them to open the credit line and let me do with it what I decide.

Anyone have any advice on what to tell them as my reason for requesting the credit line?

I assume this HELOC is on your primary residence? If so, say you want funds to put a pool in and make improvements on your property.

Or just try another lender and be up front with them. They may be hesitate with the whole flipping thing though as they are in second lien position (assuming you have a first mortgage) and they will see the flipping as risky. At the end of the day though, if anything happens, they will have the house as collateral so I don't see an issue with it. You'd think a larger lender like WF would be willing to "take the risk".

I have gotten HELOC's with different banks (including Wells Fargo), and I've learned two things are usually true: 1) They are going to want to know the intended use of the funds, and 2) They'll generally have some sort of criteria for the permissible and non-permissible use of the funds. It will vary from bank to bank, but some examples of non-permissible uses that I've actually been told by loan officers are "The funds can't be used for business" and "The funds can't be used for educational purposes". (Odd, I know.)

I always ask up front (before I apply) so that I know if it's worth my time/effort to even apply with that particular bank. 

What worked for me with Wells Fargo (and others) was to say the funds are simply for "cash reserves" (nothing more). This suggestion actually came from the Wells Fargo loan officer and my HELOC was approved.

@Kevin Barnett Be simple and honest. You want to repair your home... They just don't need to know what house it is.

I am trying to get a HELOC right now. I have a really nice LO at the bank, and we have literally gone back and forth about 5 times with scenario's that would work or not work. I am trying to do debt pay down, and she has been really nice with my "what if we. . . " questions. It was really interesting, I think on one of the podcasts, they said not to take no for and answer, or if the answer really is no, ask why. That has transformed my relationship with lenders. If I know the why, then I can ask questions about what we could do differently. The HELOC was "denied" five times, but we were able to get it resurrected, at least so far.

That being said, I agree with @Nick Britton above.

That's a good idea @Kyle J.

And just in case people that read this post don't know HELOC stands for Home Equity Line Of Credit.

Keep it simple - "home improvement"

I second what @Kyle J. said. I never actually was specifically asked what I was going to use my HELOC was for. I almost never draw on it anyways. I think I did just say I wanted access to more cash just in case.

"I want access to cash if I need it without having to pay credit card rates."

Thanks all for your replies. I called the bank today and I'm trying again. Wish me luck. =)

If the case of a HELoC, we've only told the lender we plan to draw down on the funds to invest.   They've always been fine with that.

Always be honest. If you aren't and the loan went south the lender could dig into what happened and you could go to jail for loan fraud.

I got one recently through Wells Fargo to also have extra funds for real estate deals. We just told them it was for home improvements but my wife made the mistake of telling them specific home improvements (kitchen). The problem with that is that we had already remodeled our Kitchen and the appraiser was going to take pictures! I told her to keep it non specific! The loan ended up going through even though the appraiser was clueless and valued our home at 50-70k under market so we were not able to get as big of a HELOC as I wanted. By the time I tap into the funds, if I ever do, it will be easy to say that plans changed. It would be different if I told them "home improvements" then went out and bought a Tesla the week after the funds were available.

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