Hi BP community! I'm in the process of applying for a HELOC on my primary residence, which is a condo. My plan is to use the money to purchase a multifamily property, move into one of the units and rent the other unit(s) out. My current primary residence will also become a rental. I've called several lenders and am weighing out my options... they all ask: "What do you plan to use the money for?" What's the best response to that? I'm concerned that if I share it's to buy more property, they may see that as a risky endeavor and charge me more for the loan or lower the LTV they'll offer. I can't say it's to pay off debt (I don't have any)... so I was thinking of saying it's for home improvement, but maybe they'll question why I'm asking for a $150k HELOC for home improvement on a condo? Thanks in advance for your insights & expertise!

Ceaneh Alexis these are my top contenders:State Dept Federal Credit Union (SDFCU) - 95% LTV and starting interest rate of 4.25%Unify Financial Credit Union - 90% LTV and 4.75%PenFed Credit Union - 90% LTV and 4.75%Cornexus - 80-90% LTV and 3.49% for 6 months (4.08% thereafter)I checked with many other lenders including the big banks and these were still the best from what I can tell so far. If anyone has any other HELOC lender suggestions, please share!

I have a HELOC with Bank of America and they have zero control over how I use it. Moreover, I don't remember them asking how I planned to use it, either. Example: I bought a rental property with cash using HELOC funds, then quickly paid it back down to zero balance. I regard it as self-financing on smaller-sized real-estate deals. It also speeds up the purchase process -- I had the money in hand and closing took place in days, not weeks or months. And of course, a cash offer makes a huge difference to some sellers. As for using HELOC funds for home improvement specifically on the residence the line of credit is drawn upon, it's supposedly tax-deductible. HELOCs are fantastic, and the temptation to use them for other investments is very real. For instance, since the repayment interest rate on my account is currently 4.25%, if I elected to park $40K in an investment vehicle like BlockFi, which pays an 8.25% interest rate for storing certain types of cryptocurrency on its platform, you'd actually come out ahead and MAKE money. I haven't had the gumption to try it, though. If the bank asks how you plan to use the HELOC funds, you can always give them a list of several options: Student loan repayment, credit-card paydown, car-loan payoff, home improvement, or investing. That's being honest. You MIGHT use it for all or none of those. But if you tell them you are using the cash as a down payment to secure yet another property with a mortgage, they might nix the deal. Because with the HELOC in place, they are the lienholder on your house (and possibly the second lienholder if you still have a primary mortgage in place). You might also find that the lender writing the mortgage on the new property won't process the loan if they know you are using borrowed funds as the source of your down payment. You'd be using borrowed HELOC money as the down payment to borrow MORE money on a second property, and they want you to have skin in the game, as well as something stashed away in cash reserves. HELOCs are like a credit card -- at a fraction of the 18% the cards are charging. If your HELOC cap is high enough, you could buy a rental unit (not in Laguna, though) with cash and the bank wouldn't know the difference, or probably even care. Like Rodney Menendez said above, it's your equity money.

@Elizabeth Southall HOME IMPROVEMENT every single time.

HELOC - what to say when the lender asks what the money is for?

Caroline Gerardo

Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes

4y

Tell the truth.

16 Reply

Nick Shri

Rental Property Investor · VA · Member since 2020 · 218 posts · 133 votes

4y

@Elizabeth Rose

Many banks will state, borrow HELOC for 2nd home or investment home or something along the lines. In that case you are all clear. Don't lie on your application - that could construe as fraud, and if the bank doesn't offer funds for new purchase they could close on you. I have not seen banks jack up rate or lower DTI for 2nd home purchase.

4 Reply

Elizabeth Rose

OP

Rental Property Investor · Various states · Member since 2021 · 55 posts · 34 votes

4y

Originally posted by @Nick Shri:

@Elizabeth Rose

Many banks will state, borrow HELOC for 2nd home or investment home or something along the lines. In that case you are all clear. Don't lie on your application - that could construe as fraud, and if the bank doesn't offer funds for new purchase they could close on you. I have not seen banks jack up rate or lower DTI for 2nd home purchase.

Thanks, Nick! This is good to know, and I feel much better just being transparent.

1 Reply

Russell BrazilBusiness Member

Moderator

Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

4y

Your heloc is likely to be denied if you tell them the purpose is to buy an investment property.

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Elizabeth Rose

OP

Rental Property Investor · Various states · Member since 2021 · 55 posts · 34 votes

4y

Originally posted by @Russell Brazil:

Your heloc is likely to be denied if you tell them the purpose is to buy an investment property.

@Caroline Gerardo @Nick Shri thoughts on this?

3 Reply

Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

4y

Originally posted by @Caroline Gerardo:

Tell the truth.

^^^ Exactly. It is always the best to tell the truth. The only other answers you should ever give are "do I have to answer that" or "none of your business". If the use of planned use of the money falls outside the terms of the loan, it is better to know now.

1 Reply

Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

4y

Originally posted by @Elizabeth Rose:

Originally posted by @Russell Brazil:

Your heloc is likely to be denied if you tell them the purpose is to buy an investment property.

@Caroline Gerardo @Nick Shri thoughts on this?

I have a HELOC and I told them specifically it was for investment properties. It seems buying investment properties is better than taking a vacation or buying a sports car. Maybe if the loan is specifically geared towards home improvement, they may have an issue. I am sure there are options out there to use for investment purposes.

3 Reply

Caroline Gerardo

Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes

4y

Not necessarily -- depends on where you go. Remember Wells, Citi and some others have stopped doing HELOC's all together.

0 Reply

Bud Gaffney

Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes

4y

You have to disclose what you are using the funds for. Just be honest, so you don't have to worry about anything coming up in the future.

2 Reply

Justin Phillips

Lender · Phoenix, AZ · Member since 2018 · 440 posts · 256 votes

4y

Find a lender who doesn't care. Equity is your money, you should be able to use it as such.
I have a specialized 1st position Heloc that's tied to a zero balance sweep checking account on my property. I transfer in and out of brokerage accounts, and move money around all over the place. I've locked in my access to equity so that when the market turns, I can start writing checks and putting that "trapped equity" to work.

3 Reply

Rodney MenendezPro Member

Developer · South West Florida · Member since 2020 · 74 posts · 53 votes

4y

@Elizabeth Southall

I recently took three HELOCs on three different properties with PenFed and closed at the same time. I told them it was for home improvement and they didn’t asked anything else. I highly recommend maximizing on the HELOCs, this is like having cash and you only use it if you need it.

[email protected]239-288-0702

2 Reply

Elizabeth Rose

OP

Rental Property Investor · Various states · Member since 2021 · 55 posts · 34 votes

4y

@Rodney Menendez thanks for the feedback! I've got an application pending with PenFed, along with a few other lenders... I'm shopping around before I sign on the dotted line. PenFed is offering 90% LTV, so one of the highest I've found so far.

2 Reply

Julie Toh

Specialist · Mortgage Broker Canada · Member since 2015 · 316 posts · 118 votes

4y

@Elizabeth Rose It seems that the banks in the USA and Canada ask the same question, "What do you plan to use the money for?" when you refi / take out equity. What's the best response to that? Whenever I structure my client's refi application, the answer "the funds will be used for investment purposes" pretty much speaks for itself. And this is the truth. And it is acceptable.

A heloc is an under-utilized financial tool. Most homeowners are happily unaware of this goldmine. All the best.

2 Reply

Ben Blecker

Member since 2018 · 7 posts · 5 votes

4y

@Elizabeth Southall

I’ve bought three houses off of helocs. I was asked every time what I was planning to do and I told them buy investment properties.

2 Reply

Josh Romero

Rental Property Investor · San Antonio, TX · Member since 2015 · 11 posts · 12 votes

4y

@Elizabeth Southall

I am currently in the "appraisal" step of the HELOC process. This is my first HELOC ever and decided to pursue it after watching a couple of YouTube videos. I was kinda caught off guard when they asked me what i was going to use the funds for. I simply told them i was going to use them for home improvements (which i might). I hope to use these funds for a down payment on a second rental property. They didn't ask any further questions after that. BTW, I'm in Texas.

1 Reply

Nick Shri

Rental Property Investor · VA · Member since 2020 · 218 posts · 133 votes

4y

You just need to find a lender that clearly states HELOC for investment properties. Credit unions are sure bet (although not all). Even small banks will be willing to work with you.

1 Reply

Nick Shri

Rental Property Investor · VA · Member since 2020 · 218 posts · 133 votes

4y

Originally posted by @Elizabeth Rose:

@Rodney Menendez thanks for the feedback! I've got an application pending with PenFed, along with a few other lenders... I'm shopping around before I sign on the dotted line. PenFed is offering 90% LTV, so one of the highest I've found so far.

Why have you applied with multiple lenders? That is a good reason for all of them to deny. You should only apply with only one lender. PFCU used to do 95% at one point if I remember correctly.

What exactly are you shopping for?

0 Reply

Nick Shri

Rental Property Investor · VA · Member since 2020 · 218 posts · 133 votes

4y

Originally posted by @Ben Blecker:

@Elizabeth Southall

I’ve bought three houses off of helocs. I was asked every time what I was planning to do and I told them buy investment properties.

What do you mean asked every time? Did you open 3 helocs?

0 Reply

Elizabeth Rose

OP

Rental Property Investor · Various states · Member since 2021 · 55 posts · 34 votes

4y

@Nick Shri I did not open multiple HELOCs... I contacted 7-10 lenders to ask about their max LTV and interest rates, then I selected my top 3 and applied to those.

They all told me the interest rates they were quoting were starting rates only. Based on what the lenders told me and my own research here in the BP forum, my understanding is that you need to apply and get your credit checked in order for them to give you firm numbers on what they'll offer you... then you make a decision as to which lender you want to go with. I also understand that multiple credit checks within a short time frame won’t damage your credit score, as they will be aggregated as one.

1 Reply

Ned CareyPro Member

Moderator

Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes

4y

@Elizabeth Rose wow a lot of good answers already.
charge me more for the loan or lower the LTV they'll offer.

Yup. If you want investment loans they are going to cost more. That is a fact of life. You have to account for those increased costs when evaluating a deal. Certainly you should look for good rates. Keep in mind however that today's rates are dirt cheap historically. Even the highest investor loans are often at rates cheaper than the long term average for homeowner loans.

Soapbox mode

If you lie to the bank you are committing bank fraud. While it could land you in jail it probably would not. However the more important reason not to do it is; that is not the way to be successful. If you think you are going to get ahead by cheating and cutting corners you are wrong. You get ahead in this business by working with other people. No one wants to work with a crook. OK, I'm back off soapbox mode.

2 Reply

Account Closed

Rental Property Investor · Jacksonville, Florida Area · Member since 2016 · 106 posts · 48 votes

4y

@Elizabeth Southall Just tell them that you would like to have the heloc in place, so that you can have capital available for the next ten years in case you need the money for things such as improvements. That is not telling a lie at all. Improvements can cover a wide range of things in your life. Then quickly ask the lender if they like your excellent credit and the way that you always pay your debts on time.

4 Reply

Paul Balyoz

Member since 2018 · 25 posts · 32 votes

4y

We've had great success getting useful HELOCs from Midfirst Bank, which is only available in certain states including where I am (Arizona). They had an intro rate of 2.99% when we got it, I forget for how long (6 months?) Then it goes up to Prime + some margin, ends up being around 4-5% interest annually for now. You can get the type where you pay principal+interest each month, or (for a smaller limit) interest-only payments. There doesn't seem to be a fee for balance-transfers, I just transfer from HELOC to the checking acct I have with them, then wire the funds or get a cashier's check. I can pay back extra amounts at any time with no penalty. It's an amazing instrument IMHO.

I should mention - an experienced investor friend told me he only gets mortgages/refinancing on properties, never HELOCs, because any line of credit limit can be shrunk down suddenly by the lender, any time they want to. I've never seen it happen, but I can imagine that in some situations that could happen. That's not a risk if you got an actual loan instead, like a mortgage, because all the money came out all at once; you're just paying it back over time, so you have more control over the debt that way.

1 Reply

Jim K.

Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes

4y

@Elizabeth Rose

HOME IMPROVEMENT every single time.

3 Reply

Account Closed

Member since 2021 · 237 posts · 153 votes

4y

@Elizabeth Southall

“Further investing”

0 Reply

Christina M.

Rental Property Investor · PA · Member since 2017 · 69 posts · 60 votes

4y

@Elizabeth Southall

Home Improvements

1 Reply

HELOC - what to say when the lender asks what the money is for?

HELOC - what to say when the lender asks what the money is for?

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