Using HELOC for down payment

[Kenneth Burdick]

Hi BP community,

Our current primary residence has a first-position HELOC. We were planning to use funds from this account to purchase another home, but the lender is having an issue with us "using borrowed money for the down payment." This seems like an overly simplistic way of thinking about this to me. Does anyone know of other good lenders in California that are OK with using a HELOC for down payment?

[Jason Wray]

Kenneth,

The problem you have is your using an open end line of credit for a down payment. A down payment is required to offset the risk of the loan meaning shared risk. When your borrowing from a "HELOC aka credit card its basically showing the bank that you do not have the "liquid reserves/cash" on hand to buy the property. So your creating another payment which adds to your monthly DTI just for the down payment.

One way to actually use a HELOC is to take the money out 3-4 months prior to the purchase and put it into your checking or savings account. That way when the lender requests your (2) months bank statements or proof of down payment your down payment funds will have already have been "Sourced & Seasoned". If not older than (2) months they will see the large deposit and ask you to source where the down payment came from which is why you should take the funds out 3-4 months prior.

That is why I always tell my clients to just do a cash out refinance so that you do not put yourself in this position when your ready to buy. A cash out refinance is one loan, one rate, one payment and cash on hand in the bank... You can always look for a bank that does not have "overlays" and will allow you to use the HELOC funds as long as the new payment does cause your DTI to be higher than approval.