Getting Started - Loan Structure / HELOC for down Payment

2 Replies

Hello All,

My wife and I are just getting started in the real estate space and looking for advice on the lending side and how to structure our first loan. We are wanting to utilize our home equity to finance our first deal. Our thought is that we would utilize a HELOC for the down payment in our first property, but we want to make sure that we are still able to refinance out that money to finance another detail.

Here are the 2 main questions I had to start with:

1) Do I need to structure the new mortgage as an investment property loan so that I can continue to refinance out the money I just put towards the down payment and use in our next property? 

2) Any other recommendations or advice for us in how we structure our first loan? Are their any concerns with utilizing a HELOC, besides the higher interest rate we would pay on that loan? Are their restrictions on how we can use the HELOC funds?

Any advice is very much appreciated and if you have any reccos I would very much appreciate it!



@Nick Pederson :

  1. Talk with local banks and CUs about what loan products they offer for non-owner occupied properties. You'll find a variety of options. CUs tend to be the best.
  2. There's no restriction on how you can use the HELOC. The bank financing the investment property will take the additional debt into account. So be aware of that. The key is to pay back the HELOC ASAP. They should only be used for short-term financing.

@Nick Pederson :

I did the same thing for my first rental, which was a true investment duplex (both sides rented out). My goal was to find a property that needed some work, buy it using a purchase mortgage secured to the rental and use my home equity line for the down payment and most of the renovations. Get it rented out, then apply for a cash out refi on the investment property mortgage in order to use my new equity in the renovated property to pay the home equity line off and repeat. Typical BRRRR deal

1. the home equity line is on your primary residence so as long as you continue to live there, you can generally use it for any legal purpose. the mortgage you'll get when you buy the investment property will be an investment property, so the required down payment (and rate) amount will be higher than it would be if you were going to live in it (at least 15% down depending on the bank, could be 25% down if 2-4 unit).  You can use your home equity line for the down payment, just need to disclose on your loan application that the down payment is borrowed. the lender should account for that payment in your debt to income calculations when qualifying you.  

2.  no restrictions on how you use the funds.  a lot of times they are interest only payments, which is nice when the property you are renovating is vacant with no income coming in, minimizes carrying costs until you get it rented. 

Risks other than the fact that you are highly leveraging the home you live in are that the interest rate is typically variable. 

Also, the final value the rental property appraises for is very important as that can make or break your plans.  In my case, i bought a side by side duplex and finished the basements on both sides, so each unit was a 3 bed 2 bath.  not a lot of comps out there in my area for that style home so when i went to do the cash out, I didn't get nearly enough value to get all my money back out. This would have really stretched out the time until the next deal. I ended up deciding to sell the property and start over with a more typical property that is easier to establish after-repair value on.  Luckily I got the value i needed when I sold to pay everything off and walk away with a little bit.  Seems easier to get the value you need when you actually have a buyer saying they'll buy it than it is with a refi.

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