HELOC then Refinance?

Question

Hi BP community,

I'm seeking to purhchase the real estate investment, and need some advice on financing options.

My Situation:- My spouse & I own two properties worth $600k, $200 fully paid.

- Our combined after-tax income is $170k annually.

- We have no outstanding mortgage debt.

Recently, we discussed financing options with a banker at PNC and learned that we might qualify for a HELOC up to $480k, albeit with a relatively high minimum interest rate of 9.31%. Our plan was to use this HELOC to secure off-market deals from wholesalers and then pursue refinancing.

Concerns and Seeking Advice:However, I've read discussions, indicating potential challenges in refinancing when a significant portion of DTI is tied up in a HELOC.

Given our situation, I am keen on understanding:

1. Is using a HELOC for purchasing and then refinancing a viable strategy, or does the impact on DTI make it less feasible?

2.  If you have navigated a similar path, what strategies or precautions would you recommend to mitigate financial risks and ensure a smooth refinancing process?

3. Are there alternative financing methods we should consider that align well with our financial standing and investment goals?

I appreciate the shared knowledge and experiences on this platform and look forward to your valuable insights.

Thank you!

Caroline Gerardo · Answer

Get in writing your refinance second step. Stay on your job, keep FICO high by paying more than the minimum and keeping balances UNDER 69% of available line. Maxing out the HELOC to purchase (your first step) will make the FICO go down about 11-14 points for 60 days so the rate on the refinance second step may suffer. Do not pay large fees or points to get into ANY loan. Do not accept prepay penalties- pay the higher rate and do 30 year fixed. Rates will get better sometime, then the third step is to refinance to lower long term loan.

Find a Realtor who talks to you not that sends you emails with properties. Ask the agent for contractors, handyman, lawyer, insurance guy, the friend who works at the planning desk, an architect if you plan to change things. You need a team of people who you vet before you start. Talk with them, go deep.

There are plenty of alternate loan programs but it's difficult for a borrower to really compare. Can the PNC guy do bank statement loans, or DSCR - no probably not. Get the HELOC terms, rates, max, total fees, annual fees in writing in an email not on the phone. Don't let lenders pull your credit. Have PNC give you a copy of the mortgage report- he's going to balk and say yada yada I can't; but, really he can. If he won't provide it he's not your marriage. Think long term relationships. A consumer report from myfico/creditkarma is of no use.

Work with people who are licensed, have been around the block, tell you the facts even if it's not sugar coated.

What city/ location are you targeting?

Know the school ratings, crime stats, employers, weather outlook... location is most important piece.

Dylan Massey · Answer

Hey Han,

Using your HELOC funds can be a great option! As far as the refinance is concerned, DSCR loans can be a great option. Keep in mind that if you haven't done rehab to the property, you will likely be stuck with needing 6-12 months of seasoning for DSCR lenders to use the value of the property. However, you can always do a delayed purchase right after you buy the property. A delayed purchase will only allow you to get a loan for 80% of what you PAID for the property. If you do decide to do some rehab to the property, I know of some options that don't have any seasoning requirements after rehab is done. They could then lend up to 80% cash out on the new appraised value on the property. Let me know if you have any more questions on this!

Jay Hurst · Answer

1. Yes, the HELOC payment will go into your debt to income calculation but so will the rental income you are bringing on the property you just purchased. Secondly, you can pay back the HELOC at closing with cash out proceeds. if you do that then you would NOT have to count the HELOC in your debt to income. Based on your numbers above I cannot imagine any of this would be an issue however as your DTI should be fine, but no one can give you definitive answers without an application.

2. and the last sentence of the above IS the way yo insure a smooth process. Work out your refi plan BEFORE you buy anything and that means yes, doing an application and going through the whole process. Do not attempt to short cut.

Brayden Hrycko · Answer

Hello @Han Jaewon,

This depends on what you're looking to do. Using a heloc to fund purchase and rehab is very common. Also, we won't need access to your dti if you are refinancing rental properties under DSCR Investment loans. Feel free to reach out if thats where you're looking to go.

Han Jaewon · Answer

@Caroline Gerardo Thank you so much for the comprehensive advice! Your practical tips are incredibly helpful.

And thank you everyone for taking the time to share the valuable guidance with me!!

Erik Estrada · Answer

Hi Han,

You may want to consider DSCR loans for the exit strategy. If the property needs rehab and you would like to do a cash out on the new appraised value, conventional lending will require 12 months seasoning. You may get around this with a DSCR loan since you would only need 90 days seasoning.

DSCR loans qualify you based on the rents covering the full mortgage payment instead of looking at your personal DTI. They do carry prepayment penalties, however you can buy it out and keep the same rate.

Jeff Prow · Answer

Using the HELOC to pay cash for the property sounds like a good way to go and yes, the rents should help offset some of the debt for your DTI ratio.  The All in One Heloc may have a little better rate and terms on it with some other benefits if you have looked into that program.  I can answer any questions on it if you have any.  DM me with any questions.

Han Jaewon · Answer

Thanks for your insights. I've noticed some appealing deals through wholesalers, which requires cash/hard money only, which is why I'm keeping that as an option alongside exploring MLS listings with a traditional loan. We're targeting properties around the $300k mark, and with the banker at PNC indicating a possible HELOC of up to $480k, my thought was to leverage the HELOC for an all-cash purchase. The plan would be to then refinance shortly after to pay off the HELOC and secure a traditional loan.

Based on your experience, do you think this approach is a reasonable way to proceed?

Han Jaewon · Answer

@Jay Hurst Thank you for your advice! I didn't know rental income can impact DTI. I appreciate your time and guidance :D

Caroline Gerardo · Answer

The HELOC has a start rate of Prime 8.5+ 3 ish, depends what your FICO is. The maximum cap is 23% it's 15 year amortization. You will qualify for less with a 15 year loan as the payment is higher and lenders use the maximum payment. A HELOC will get you the down payment/closing costs and be ready to close and look ready in the purchase contract but is the HELOC enough to pay all cash?

Maybe rates will come down in the future where it will be more comfortable?

Why a wholesaler? That's an extra cost in some situations.

HELOC then Refinance?

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