HELOC for down payment, then how to get second mortgage?

Question

Hi there

I just bought my first house in Edmonton for 170,000. We renovated and are looking to make it worth around 250,000. The plan is to refinance and get a HELOC for 80,000, with which we would use some of that as a down payment on another property similarly priced that we can reno and rent also. Does that make sense so far as an option? Then once I get the HELOC, how do I get a second mortgage?

Thx in advance.

Cindy H. · Answer

I have an existing HELOC on my house (in Calgary) and wanted to buy a second property using part of my first HELOC as the down payment and then opening a separate HELOC on the new property.  I chatted with my bank and they said no problem.  Some things to keep in mind though 1) even if you have paid off your first HELOC, their risk assessment will assume you are carrying the full amount as debt when assessing your ability to carry the second HELOC (after all, you can spend up to the full amount at any time)  2) if I wanted to have less than a 35% down payment the bank wanted me to have a combination of mortgage and HELOC, 3) it's more important to have a full time continuous job than it is to have assets that could pay for your house....I work intermittent contracts...they didn't like that at all.  Luckily, my husband has a full time job so even though they didn't like my situation, his situation stabilized it somewhat (first house is in my name, second house will be in both of our names).  Just describe what you want to do to a few lenders and see what they have to say, be wary if they tell you that you can afford a property of "X" amount that seems high.  Thankfully we decided to stay well within the first amount they told us because at the end of the day, the amount they approved us for was much less (and far more reasonable). Hope this helps!

George Lay · Answer

You can get the money for downpayment out of the current property in one of two ways:

1. sell the current property

2. refinance the current property

Natalie Rose · Answer

So you mean the down payment coming from the previous property as in if I sold it? Thank you very much! I’ve got a few books on the go right now along with podcasts and webinars. Very early stages learning right now thank you for your time I appreciate it!

George Lay · Answer

Natalie,

By "second mortgage", I assume you mean refinancing the property to get a whole new mortgage versus simply getting a "second mortgage" behind your current "first mortgage" which is a lot more expensive.

To answer your question a little more, there probably needs to be a little more background... If you purchased the house for $170,000 how much did you put in terms of down payment in the purchase? For instance, if your mortgage at the time of purchase was $136,000 (80%) and if your property is now worth $250,000. Assuming the bank is willing to qualify you again for 80% the value of the property today,  you can now borrow $200,000. You've basically gotten $64,000 back where you only put $34,000 in downpayment.

However a couple of things to remember:

1. Although you got all your downpayment back, you probably sunk a bit of money into the renovations. Now if you spent less than $30,000 on the reno's you've basically got no money in this deal which is a great position to be in.

2. This doesn't take into account that you have to make mortgage payments on the $200,000. The ideal is to rent the property out where you can make money on a monthly basis while taking into account all the expenses including vacancy, property management, taxes, repairs and mortgage payments.

If your numbers work, then your property is basically offset by the incomein the bank's eyes and you should be able to qualify for another $200,000 mortgage and repeat the process (assuming you could qualify for that amount in the previous paragraph)

If not... the qualification requirements of the bank become even more important. Where they're going to look at your income, assets, downpayment, and credit to see if you can qualify you for more.

And finally on a technical note, if you qualify for the $200,000 limit, (depending on whether your bank has the product) a HELOC can be structured within the $200,000 limit up to a maximum of 65% of the value of the property. Using the $200,000 example, your HELOC limit would be $130,000 and the remaining $70,000 would be some sort of fixed/variable rate mortgage)

George Lay · Answer

Hi Natalie,

Based on your questions, i think there's a big learning curve that you're going through right now, and to answer all your questions would probably take a book rather than a discussion forum. I'll PM you my number and you can call me to discuss further.

I would recommend that you keep it simple and just finish the reno on the current house and then work on refinancing the current house to get your cash out. The positive cash flow is good, but the bank doesn't quite look at it the same way that you and i would when it comes to getting a mortgage. Generally, they'll recognize 50% (some banks may recognize more) of the rent and 100% of SOME of the expenses in determining your borrowing ability.

You would need to qualify for a new mortgage on the new property and the downpayment would come from the previous property.

Natalie Rose · Answer

@George Lay

Hi there thank you for your response. By second mortgage I just meant the mortgage I would have on the second house.

I really don’t know much about investing and I’m just trying to explore as many options as I can as I do not have much of my own money.

We paid 17,000 as a down payment which put our mortgage at 153,000.

We are putting between10,000-12,000 into renovations. The math on our house as a rental property works out to $200 a month positive cash flow after paying mortgage, insurance, vacancy, repairs fund.

I was hoping I could refinance once renos are done and use a HELOC as a down payment on a second property, but then do I need to qualify for a mortgage the same way as I did on the first one? So that I have 2 properties with 2 separate mortgages plus the HELOC to pay off? Like if I get 50,000 HELOC and I put it into a 100,000 house, can I get another mortgage on that remaining amount? I’m sorry I’m completely new and just trying to learn as much as I can

Is it better to work with an investor for the financial side of a deal?

HELOC for down payment, then how to get second mortgage?

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