Investor · Atlanta, GA · Member since 2016 · 10 posts · 6 votes
Hello All,
My wife and I have finally made the decision to dive into our REI dreams and begin making the plans to make it all reality. We have set a goal of purchasing our first property in 2018 and are looking into different strategies. I currently own a home and was interested in the idea of using a HELOC for down payment on our first investment property. While it is an appealing option, I am unclear on if its a viable option - as it would leave me with essentially three mortgage payments (my residence, investment property, and HELOC payment). I was curious to know if any of you have used this method for a down payment or what you more seasoned investors thought of the idea. Any insight would be greatly appreciated.
@Brian Patrick we haven't done this yet, but have discussed it with our mortgage broker to make sure we do it right if the opportunity arises.
There are two main steps:
1) draw on the HELOC far enough in advance so that the deposit doesn't show on the last two months' bank statements (provided that's how many statements you need to show).
2) be able to qualify for the new (investment) mortgage with the minimum payment on the HELOC included in your DTI.
So, yes, you'll likely have to qualify with all three mortgages (old, new, and LOC) counting towards your DTI. But don't ignore step #1, even though it comes with 2+ months of "wasted" interest.
Good luck!
@Brian Patrick we haven't done this yet, but have discussed it with our mortgage broker to make sure we do it right if the opportunity arises.
There are two main steps:
1) draw on the HELOC far enough in advance so that the deposit doesn't show on the last two months' bank statements (provided that's how many statements you need to show).
2) be able to qualify for the new (investment) mortgage with the minimum payment on the HELOC included in your DTI.
So, yes, you'll likely have to qualify with all three mortgages (old, new, and LOC) counting towards your DTI. But don't ignore step #1, even though it comes with 2+ months of "wasted" interest.
Good luck!
The only reason you need to worry about how long your HELOC money is in your account is if you are only looking for conventional financing. If you go with commercial financing, where you get your down payment money and how long you have it is not the primary concern.
@Brian Patrick we haven't done this yet, but have discussed it with our mortgage broker to make sure we do it right if the opportunity arises.
There are two main steps:
1) draw on the HELOC far enough in advance so that the deposit doesn't show on the last two months' bank statements (provided that's how many statements you need to show).
2) be able to qualify for the new (investment) mortgage with the minimum payment on the HELOC included in your DTI.
So, yes, you'll likely have to qualify with all three mortgages (old, new, and LOC) counting towards your DTI. But don't ignore step #1, even though it comes with 2+ months of "wasted" interest.
Use your HELOC for a BRRRR rental. As long as it doesn't kill your debt to income. Use the loan, along with private or hard money, to purchase a fixer multi family rental, then refinance and use the re-fi money to pay back the LOC. You could, essentially, use that same HELOC to build your entire portfolio if done correctly.
Brian,
I actually did this last week.
I house hacked a duplex 4 years ago out of college and began building equity.
I found another property to purchase but only had 20k of the 60k needed for a down payment.
I was able to take a Heloc for the additional 40k to get me there. It was worked out great and the interest is only 200 a month so if things get tight it isn't a huge burden.
Theoretically I will be throwing all the additional rent at the Heloc to pay it down.
Also, a Heloc is pretty great in general because it can be drawn on at any point in time. I think I will be looking to use this option time and time again as my equity in my first property grows. Saving 25% cash is hard so being able to kick in an extra 30-75k from a Heloc makes all the difference.
@Brian Patrick, We've used a HELOC from our primary residence as down payments on our last two investment properties. The interest comes out to practically nothing on a monthly basis. Just know that if you have a balance after the draw period you will need to be able to afford to the principal payments at that time in addition to the interest payments. Also, consider your income and reserves. If your margines are very tight and an increase in the interest rate by several points will put you underwater, then maybe look at other ways to finance your properties.
Brian Patrick great work so far!
You can absolutely do this. I was able to do it with an online lender and made the draw a few days before closing. I was up front that this was the source and made sure it was ok.
Good luck.
@Brian Patrick, We've used a HELOC from our primary residence as down payments on our last two investment properties. The interest comes out to practically nothing on a monthly basis. Just know that if you have a balance after the draw period you will need to be able to afford to the principal payments at that time in addition to the interest payments. Also, consider your income and reserves. If your margines are very tight and an increase in the interest rate by several points will put you underwater, then maybe look at other ways to finance your properties.
You can absolutely do this. I was able to do it with an online lender and made the draw a few days before closing. I was up front that this was the source and made sure it was ok.
Good luck.
Thanks for all the advice, guys. This is why I love BP. Such a supportive community!
@Brian Patrick and @Marco G., I did the same thing as Marco w/ respect to seasoning. I had closed on a property back in July and after told them about my intention to take out a HELOC on my primary and use it towards the down payments on the next properties I purchased. They said they were absolutely fine with me doing that as long as the DTI works out and their underwriting requirements are met. Once I closed on the HELOC I sent them the closing documents and the first statement which came a couple of weeks after the closing. I believe I entered into a contract on the second investment property before I even received that first HELOC statement. I didn't move the money out of the HELOC until about two weeks prior to closing and in total I had the HELOC maybe for a month and a half. They just required me to show them where that money came from with respect to hey look this is my balance in my HELOC, here are the transfer confirmations to my checking account, and here is my checking account reflecting the transfer being received type of thing. The only thing I regret w/ respect to the HELOC was not taking out a larger one so I could expand faster w/ respect to purchasing investment properties.
I also have experience with this. I wanted to buy a 3 property portfolio from another investor. The down payment was just over 100k for properties totaling just over 500k. I'm very fortunate to have a decent amount of equity in my primary residence, so was able to secure a HELOC of 100k and I only had to come up with around 9k of my own income. The rent on the 3 units more than covers the 3 conventional loans and the HELOC payment.
Depending on the bank, they sometimes run specials on interest rates and such. I believe US Bank was only 2% for the first 6 months. For the first 10 years, all you are required to pay is the interest, although you want to keep in mind that once the 10 years are up, you'll lock into a 20 year payment plan with P&I. So you don't want to leave too much hanging until then. The added bonus is, the quicker you pay down the principal, the quicker you free up those funds to use again and again! US Bank allows withdraws for the first 10 years.
Hope this helps! It was for sure the only way I would have been able to pick up that portfolio. :) Good luck!
I also have experience with this. I wanted to buy a 3 property portfolio from another investor. The down payment was just over 100k for properties totaling just over 500k. I'm very fortunate to have a decent amount of equity in my primary residence, so was able to secure a HELOC of 100k and I only had to come up with around 9k of my own income. The rent on the 3 units more than covers the 3 conventional loans and the HELOC payment.
Depending on the bank, they sometimes run specials on interest rates and such. I believe US Bank was only 2% for the first 6 months. For the first 10 years, all you are required to pay is the interest, although you want to keep in mind that once the 10 years are up, you'll lock into a 20 year payment plan with P&I. So you don't want to leave too much hanging until then. The added bonus is, the quicker you pay down the principal, the quicker you free up those funds to use again and again! US Bank allows withdraws for the first 10 years.
Hope this helps! It was for sure the only way I would have been able to pick up that portfolio. :) Good luck!
did the bank that gave you the traditional mortgage care about where you got the down payment?
@Account Closed It was US Bank, and no, the only thing they made me do was transfer the funds out of the HELOC account (also through US Bank) and into a personal account before closing.
I have had the unfortunate experience of applying for 3 different HELOCs with 3 lenders over 6 months. My FICO was over 800 about five months ago. My normal lender recommended the strategy of using the HELOC while the property seasons for six months, and is prepared to refi us out at a later date.
Anyway, two of the three lenders used desktop underwriting, which came in with much lower values than I expected. We attempted a HELOC on the front end of our renovation, and hoped for DU, but they wanted to send in a full appraisal. That was Navy Federal. The house was fine when we started the application and by the time they ordered the appraisal, 42 days later, the kitchen was gutted...so they "paused" the application, but that still cost us a "hard pull" on our credit.
With our primary residence, we had rehabbed a property to include new roof, new A/C and new high-end kitchen. There is a much higher value than desktop underwriting might suggest, and I requested a full appraisal. This was with TD Bank, and the rep said Nope to the appraisal.
And we had a rental that has been paid down quite a long time, and caught appreciation in the market. A local credit union used a “soft pull” on our credit, and said there wasn’t enough value, using DU.
This strategy is a solid one, in theory. Right now my credit score is down to 726 and I'm not risking another "hard pull" to get a HELOC at this point. We will just get to the end of the seasoning period and do a refinance on the house. And wait for the credit score to bounce back up.
@Account Closed It was US Bank, and no, the only thing they made me do was transfer the funds out of the HELOC account (also through US Bank) and into a personal account before closing.
nice so you were practically 100% financed? and you were still cash flowing? im finding hard to find deals like this in my area.
Kerry Baird !! I had the same desktop appraisal! Only in my case, it hurt the total. They compared it against a couple of properties that were purchased low as flips, and when I got the information and looked up those particular properties they were already for sale again for over 100k more than the previous sale. :/ in my case an actual appraisal would have been better. Apparently you can request a full appraisal vs the desktop if wanted, just depends on your circumstances.
Alex Abanto - yes, I actually got a decent discount for buying the package, but all 3 are only blocks from a university... students will generally pay more per room in the area so I was generating around $6,500/month rents vs the 3,500 or so in mortgage payments, including the HELOC payment. I've definitely had other bumps along the way, mainly horrible inherited renters, but slowly we are flipping them over. :)
Kerry Baird !! I had the same desktop appraisal! Only in my case, it hurt the total. They compared it against a couple of properties that were purchased low as flips, and when I got the information and looked up those particular properties they were already for sale again for over 100k more than the previous sale. :/ in my case an actual appraisal would have been better. Apparently you can request a full appraisal vs the desktop if wanted, just depends on your circumstances.
Alecia, you may be well served by keeping tabs on those same two properties (and the same Loan officer who used them for low appraising), and go back AFTER they sell again for their full ARV. If YOUR property is in the same condition, hopefully they'll have run out of excuses not to appraise it PROPERLY! Cheers...