Concerns about getting a HELOC!!! Not needed??

Question

My wife and I are opening a HELOC on our current residence to have as backup for a property we are about to acquire. We should have the cash for down payment and rehabs but just wanted the money available for any unforeseens. In the loan app process we were asked if we plan on taking out another mortgage because if so we may not get approved for line of credit. We said that we weren't because again we don't intend on using it. I've seen a lot of investors have HELOCs for use as emergency cash. My wife is concerned that once we get loan, we close it next Thursday, that we will get in trouble if we get loan on this property. Anybody familiar with this scenario?

Justin Bush · Answer

Thank you all for the replies! I spoke to my lender today to make sure all would be ok and legit. He said as far as HELOC before loan, should be OK. They will figure worst case scenario which is whole loan spent and payment every month.  The loan is for 120k and rate 3.4....soo ~400$ a month diveded by 2 incomes isn't going to set off the alarms. He said go for it...better to have and not need than need and not have.

Hok Lai · Answer

Hi Justin,

I am also in the process of getting HELOC from wellsfargo, but I was quoted for 4.75%! Such a huge difference from the 3.3% that you are getting!! What is going on!?

Justin Bush · Answer

Hey Daria,

We read different peoples opinions on whom to go with, not your main bank or with your main bank, in the end we chose our main which was Wells Fargo. I don't have all the terms in front of me, just the Jets game, but they sound about the same with a rate of 3.3. With using our bank they have access to our other accounts so they know wer good for it.

Good Luck!!!

Daria B. · Answer

Justin-

who did you go with for your HELOC?

I've spoken with a few local CU who all seem to have the same script: minimum 2-3 yr and closing costs are waived, otherwise if the account is closed then the CC come back to me to be paid; 10 yr draw with remaining 20yr as payback; can do renewals after the 10yr period; no application fees; usual credit report and appraisal of the primary property; LTV up to 85% for one and 70% for all others I looked into. One lender actually said 100% but the rates are much higher, others won't take that risk so they don't offer it,

Only one had a program that on the draws I could ask for what they called 'fixed rate advance' that puts the draw into a fixed rate for term (ie 15,30,20,etc) my choice. But that interest rate was much higher.

They all said they use the prime rate + their points on top but no one could tell me where there range would be other than one that said flat out minimum of 3.99%, which means it would likely be more.

How do you figure out which one to go with?

Luka Milicevic · Answer

I guess most people answered your question already.

As a general rule, know that your lender looks at EVERYTHING.

Daria B. · Answer

A few years ago the financial advisor used for out 401k at work suggested that I open a HELOC as a just in case. Never know when you may need it, he said. I didn't listen as there was so much going on - NOW I see the benefit. LOL

Currently I only have 2 mortgages on investment properties, my primary is paid and I carry "no" credit card debt or other debt.

I have funds for the down payment but not completely for the rehab. I figure I can conventional loan it and use the HELOC for the rehab. In the end, refi to pay back the HELOC and roll everything into a new loan on the property.

As with the original posting, I too want to utilize the HELOC for rehabs since I am not able to finance that portion with a conventional. The property as it stands "likely" may not all it to be rolled into a conventional if any of the systems are not up to the appraisers evaluation. In short, a lender told me that he rejected a loan because there was a 3 Ft hole in the roof of another applicant. While there is no such thing on this property I am looking at, it does need upgrades and I don't think they will finance the rehab part. So, onto another strategy, which was the HELOC.

Sounds like I have time to get it in place as the homes that are revolving on/off the market haven't changed and I see new stuff come on everyday.

Jeff Brower · Answer

As long as your debt to income ratio is not too high then you shouldn't have to worry about the heloc. You are correct that lenders want the funds 'seasoned' in your account. So if you are in fact using the heloc to fund your down payment then you will need to let it sit in your account. 2 months sounds right but I have also heard some saying 6.

Some folks will use a large heloc to simply purchase cash and then refinance afterwards. Without a mortgage application you don't have to worry about dti ratios and seasoning of funds. I am actually doing this right now on a hud home.

Daria B. · Answer

@Jeff Brower

How then does one go about "using" the system?

I've read a lot and been in on conversations where others are using or just getting HELOC to do rehabs or "buy" property. In the case of rehabs, they are buying the property through conventional methods or other lending types and using the HELOC for down payment or rehabs.

If the HELOC is not drawn upon, do the conventional lenders still look at the fact that the money is "available" to be drawn on? (massive editing:  you did say they look a the entire amount available-ok) If that's the case how is HELOC beneficial?

And what is a "graceful" period of time when opening a HELOC - letting it sit - and then going after a conventional loan for purchase? I know lenders always want 2 months of paystubs, bank statements, etc.

Thanks

Jeff Brower · Answer

@Daria B. to answer your question, yes, a heloc is looked at just like other revolving credit. It is actually worse because they will count the entire approved heloc amount minimum payment against your debt to income ratio, not just the amount you currently have borrowed. Say you are have a heloc with a max 20k draw but you only have 5k borrowed. They will use the minimum monthly payment on the 20k against your dti ratio, even if it just sitting in the bank!

Since this is the case, be careful obtaining a heloc right before you try to get another mortgage as you might not qualify for the new loan on a dti basis.

Daria B. · Answer

From what I read of the 1st 2 sentences, it would appear @Justin Bushis now in the process of getting a HELOC on their primary property. And also about to go through the process if not already into it to buy another property. Is that right?

In my case, I am looking to open a HELOC but am not in the process of getting another investment property. I want to do the HELOC first and then later on go through the loan process for the next investment property. Not do both at the same time.

@Luka Milicevic in your experience do you know if a person that already has a HELOC in place, if going for a new loan, would the new loan process from the lender look at the HELOC like they look at all other things: ie credit cards, bank statements, existing mortgages, etc.