How to best use my HELOC

[Eric Cucullu]

First of all sorry about how long this is.

So here's my situation. I was able to buy my house as a fixer-upper. Got everything fixed up and made it good. After the house was re-done it appraised 147k on a 62.5k loan. I was in able to turn around and get a HELOC with a 61k limit.

Obviously I was very happy with that. So my strategy was to find another place to fix up to make a rental. my goal was to get a Construction type loan that would let me get my hands on another place. Then I was going to use my HELOC to rehab it. Then I would get a conventional loan To pay the other loans back. Then was going to to a HELIC on house number two and keep going with a Domino effect.

Well now for the issue....so even though I have not touched my HELOC credit score is very good and no history of missed payments, Unfortunately the bank says I do not have enough income to be able to do a construction loan. Because of this I'm kind of stuck.

My question is what would you do if you were me? As of right Now I’m partnering with a buddy of mine and might be able to help him get rentals and the way I help him is by being treated as a hard moneylender to cover the rehab and when he does a cash out refi I would get a bit on that end.

If that works out should I focus on paying my mortgage off quicker to where I can raise my HELOC?

If I do pay off my mortgage completely and have the higher HELOC will that make it to where they still will not let me get a loan?

[Kerry Baird]

There are an infinite number of possibilities in your future, right?  You appear to be interested in investing, and it seems that you are attracted to and getting experience in the renovating side of things.  If this is so, read on.

IF you pay off your current mortgage, you would have to qualify (again) to obtain a higher HELOC, and many lenders do not prefer a HELOC in first position. And you would have all your money in equity, but have little cash to go forward.

As for a suggestion or two on what to do next...  

The problem is that you are trying to do another formal construction loan on an investment property vs an owner occupied property. The investment property mortgages require a larger down payment and higher interest rate. It is a riskier loan for a lender to make. Your debt to income DTI is getting high. How to turn that around?

Would the numbers work for you to move out of this primary residence, and turn it into a rental?  Only do this if it will rent for more than your current mortgage.  

We got started this way:  Look for another fixer to owner occupy.  If you choose too rugged a project, it won’t qualify for a traditional mortgage.  Rugged = holes in walls, holes in floors, loose wires, broken window panes.  These will need a construction type of product.  If you want to do a more difficult project (with the issues I mentioned) those often require a hard money loan or one of those construction loans.  

I have also had seller financing work out so that we could afford to do the renovation for six months or more, and then refinanced out of the seller financing.  I got seller financing on our current house (in my BP blog) and on a vacation rental that I picked up last month.  6% interest only is what we got on both properties.  

You could keep looking for owner occupied properties to renovate, stay in them at lease a year...which is the requirement for your typical mortgage...and then sell the house you leave behind, or rent it out.  If you remain in a rental house for any 2 years out of a 5 year period of time, the gains are tax free.    

By the time you have done this a time or three, you will have more equity in the first property.  Tenants will pay them down, they will have more deductions as investment properties so you will have added tax benefits.  

Many lenders will not count the rental income as income until you have owned them for 2 years, so keep that in mind.  

We just bought house 32 and 33, but got started in the manner above.