HELOC using Appraised ARV - Big Fail for me

[Bryan Loveless]

Hey BP community,

I have an investment property that I bought cash, and I recently tried to do a HELOC On it with Wells Fargo in order to get my cash back out. As this was my first time trying to do this, I hit a few bumps along the way, and ultimately ended in getting denied.

Here's what happened the first time:

Bought SFH property for 90k cash. Fixed foundation for 5k. I expect pre-repair value to be around 130k, and post repair value to be around 180-200k by looking at comps in the area that several realtor friends provided. A couple months later, I apply for HELOC at 60% LTV on my property. The person selling me on the product tells me (when asked) that LTV is calculated on the value of the home which is determined by an "advanced method that the underwriters will not share with me" and that sometimes an appraisal is ordered from an appraisal company. I asked because I wanted to make sure my credit was not run for no reason and so I didn't waste my time in this process if appraisal turned out less than I expected.

Speed Bump 1 that I need to avoid next time - underwriters came back with value at 90k. Explanation: Sale occurred <12 months ago, so they use the lesser of sale price vs current appraisal value (not post renovations). This would have been great knowledge beforehand. So my asking value of 60% of the 130 I was guessing it was worth (78k) was now reduced to 54k (.6*90). Fine. Next step, make sure I qualified. Credit score is excellent, current debt/current income, like 15%.

Speed Bump 2 and ultimate derail: WF calculated my DTI as my taxed income from 2 years ago (MUCH less than current level), ONLY from the salary I drew at my 9-5. So not only did they not use any of my investment income, even if they had, it would have been the levels I achieved 2 years prior. They then took this 2 years old limited income figure, and put my CURRENT debts over it. When calculated this way, my DTI was blown out of the water at like 45%.

All in all, I learned a lot of what to ask for next time when considering the terms of the HELOC I want/need. In retrospect 60% LTV is low, I need my LTV to be based off ARV (preferably post-repair for most value), and maybe I'm wrong about this, but I think DTI should be calculated as Current Debt/Current Income.

Thanks in advance!!