Using HELOC for investment property questions

Buying & Selling Real Estate
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Using HELOC for investment property questions

Jacob D.
Member since 2021 · 15 posts · 5 votes

I'd like to setup a HELOC on my house and purchase another multi-family.

1. Once the HELOC is setup, do I need to draw the funds into my bank account (for the down payment), or can it stay as credit until I purchase the house? Basically, can I directly write a check from my HELOC to fund the down payment at closing or will it need to be seasoned in my bank account?

2. If I have a 10 year interest only HELOC, will my lender add in the principal payments when calculating DTI?

3. My 3 family has been rented out for a year and I already filed taxes, will my lender use the full rent from my lease or some risk-adjusted percentage of rents (like 75%)?

4. I've read that DTI for investment properties must be under 43%. With my next purchase it will be about 38-40%. Given this, is it possible to find a bank that will let me put down 15 or 20% - 30 year fixed right now?

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  • Jody Sperling
    Omaha, NE · Member since 2020 · 611 posts · 665 votes
    5y

    All good questions and many financial institutions vary in how they address your questions to some degree, but I'm a HELOC fanatic and all my income flows through one of these bad boys. Double check with you specific bank, but these are generally how banks treat your questions:

    1. You do NOT need to season money from the HELOC in your bank account. Simply transfer it when needed and write your check. HOWEVER, to make a HELOC superpowered, put all your money in it. Every dime, every time. By doing that, you get a % return on investment of whatever amount of interest you avoided by drawing down your HELOC balance. We've set it up so all our bills pay on credit cards and all our income goes into the HELOC. We pay the CCs on the due date, in full to avoid interest there, but for the 30 days the balance is on our CC it is interest free. I could nerd out and show you our ROI in interest avoided, but I trust you'll take my word for it.

    2. Your lender will always factor in minimum payment only obligations to DTI, so they will factor in the whole lump of debt, but the monthly payment is how they consider the % of income to debt.

    3. Unless your bank is vastly different then all those I've ever worked with, they will not consider your rental income until it has shown up on two consecutive tax returns.

    4. My bank allows 45% DTI for investment properties so I know this one varies based on the institutional appetite for risk, but my guess is you were running your numbers thinking the rental would count as income. You may be more in the 47% to 53% range, but don't fret. I bought two houses with private money and my HELOC cash this year. Once they were fixed up and rented, the bank gladly refinanced, allowing me to pull my cash out. In other words, focus on rehab deals and build a network of lenders so you can detach from the banks as much as possible.

    Best of luck!

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  • Brian G.
    Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
    5y

    @Jacob Duyon @Jacob Duyon 1) Does not need to be seasoned. You can literally write a check, deposit it and wore that money right before closing 2) They will use the minimum payment you are obligated to 3) Lender specific 4) Lender specific

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  • Jacob D.
    OP
    Member since 2021 · 15 posts · 5 votes
    5y

    @Brian G. @Jody Sperling Thank you for your responses. I do have a quick follow up:

    When a bank is looking at your financials (bank statements and etc), and 50% of the downpayment is coming from a HELOC - what will they say when I don't have enough cash to cover the down payment in my account?

    1Reply
  • Jody Sperling
    Omaha, NE · Member since 2020 · 611 posts · 665 votes
    5y

    They only care that you have the cash. For example, I'm closing on a house in which the primary funds are coming from a private loan. If the bank is holding the loan credit score and DTI are really all that matter.

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  • Brian G.
    Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
    5y

    @Jacob Duyon you can draw on the Heloc to put a chunk of money in your reserves account (ask your lender what the reserve requirement is) AND use your Heloc for the down payment as long as the monthly payment for your Heloc works with your DTI after doing both. Having said that, do everything you can to pay the Heloc off asap. Look for ways to increase your income. Good luck!

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