HELOC for down payment, Conventional Loan for remainder?

Question

If I have equity in my home and get a HELOC, would I have to use the equity to purchase one investment property outright? I would like to be able to cover several down payments using the HELOC and then get conventional or portfolio loans to cover the property purchases.

When I think through it, I am worried that having a HELOC open and on my credit would hurt me when trying to close on an investment property.

Does anyone have experience with this?

Lily Quan · Answer

If you are planning on using equity from a home, look into a private lender that offers you a business line of credit.  They won't record this on your credit report but be sure to calculate it into your payments.  The business line of credit I have knowledge of has no prepayment penalty and is interest only and works well with what you are proposing @Joan Brown

Will Chamberlin · Answer

@JAMES CASTRO, sure thing. For the first house I paid cash using the HELOC on my primary residence. I think if I were more experienced, I would have only used enough to make the down payment but I don't think it was a huge err since it allowed us to make a strong offer and close quickly. Since I owned the rental outright we took a HELOC on that one for 80% LTV at market value and have used that basically as a checking account to put down payments on three more houses, each using conventional financing. Again, I think with more experience I would have tended to wait it out for a year (seasoning as you mention) to make improvements and potentially force some appreciation but it has not been a bad decision to date.

In your case, if you have a decent amount of equity in the houses and the rate on the existing notes are such that it doesn't make sense to refinance them then I like pulling money out via HELOC. You don't pay interest unless you use the line and can just sit on it until you need the cash for the next deal. In my case with the first rental, I put all cashflow from the properties we now own back into that account to pay it down as fast as possible to be ready for the next deal as well as make sure I have sufficient reserves in case something comes up. I am still a full-time W-2 guy so my pace is probably slower than most but I am pretty conservative on the numbers and not in a rush to do this all in one year.

Hope this helps, just let me know if you have any questions and I am happy to clarify/add details.

Will Chamberlin · Answer

@Joan Brown, I have done this technique and haven't had any credit issues (scoring or otherwise). I got a HELOC on my primary then have leveraged that into 3 SFH and a triplex so far. Also used the HELOC for the rehabs. Ran out of HELOC so using the cashflow to pay it down now as fast as I can until I can afford another building. It has worked well for me so far. I would just advise you make sure to include the HELOC payment in your cashflow analysis for the property. Good luck!

Aman Khan · Answer

@Will Chamberlin and Account Closed old post, but I was wondering how your are able to use HELOCs for down payments. I was told by  a lender that a down payment can't be made using borrowed money. Was my lender simply wrong? If you could explain that to me I'd appreciate it. Thanks!

Account Closed · Answer

Get the Heloc set up first. It won't hurt to have it and not use it.

After when you look for a lender, make sure you let your lender know everything of your plan. It's usually 25% down. If they're investor friendly this would be no problem at all. If they aren't, they'll come up with excuses and improperly calculate your DTI and such. Just make sure you get pre-approved first and make sure can close before finalizing with appraisal and such.

Interest Only Heloc is better for DTI since it's much lower monthly payment. Make sure you are disciplined to pay the principal down on your own too.

I have done it and helped others in my area do it. It all comes down to finding a lender comfortable with lending on investment property.

Joan Brown · Answer

Depends on the loan type. Here is my experience:

1. If you are doing commercial loans from a portfolio lender, they don't always sell the loans on the secondary market, so they can have much looser lending requirements. I have not had problems with my local portfolio lender when I disclose the down payment is coming from a HELOC.

2.Lenders do not like to see borrowed money for down payments for conventional loans. I think they are prohibited from allowing borrowed money for FHA or VA loans. When I did a conventional home mortgage with the same bank as #1, they wanted to see cash in the account and know where it came from if it wasn't there for a couple statements back.

I am not a banker. I do not play one on TV. This is just my experience!

Joan

Will Chamberlin · Answer

@Aman Khan, it has never come up as an issue for me. Have done it a few times with various lenders, too. I think it is probably an issue with your lender and you should shop around. If that is the only lender you can work with then maybe form an LLC and use the HELOC to fund it. I wouldn't think they can go back far enough to know where it came from or care at that point but I am not a lawyer or accountant so make sure you do it the right way.

Preston Schmidt · Answer

It will not hurt you at all. Although it is treated similar to a personal line of credit, it will be secured by your primary residence which looks much more favorable to underwriters than an unsecured line. I don't even think you can use funds from an unsecured PLOC towards a down payment anyway because that is considered borrowed funds.

JAMES CASTRO · Answer

@Will Chamberlin

Can you elaborate on how you leveraged your HLOC to buy more properties. Did you buy properties outright then refi into long-term loans after seasoning, use it for down payments, rehab etc.?  I'm trying to educate myself on how best to leverage the equity in my rentals to purchase more properties but not sure what is the best way to proceed.  Thanks

HELOC for down payment, Conventional Loan for remainder?

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