HELOC Rant

[Daniel Hsieh]

So I spent a big chuck of my time last week trying to get home equity line of credit on my 3 properties. Using the rules of thumb that primary is 80% and rental propertyies at 70-75%, I figure I could get over 100k line of credit. For those who are thinking about getting line of credit from conventional bank (like Wellsfargo), here are the things they told me.

Good things first

• They will bear the costs of closing. Meaning everything from application, appraisaland everything. Very nice.

• They can waive the maintenance fee which is usually 75/year. Very nice.

• The rates range from 4-6 percent (depending on the credit score). Amortize over 30 yrs and refi at 10 yrs. If you don’t refi, balloon at 10th yr.

Now the frustrating parts

• Primary at 80% of value minus balance. If your primary is valued at 400k and loan balance is 280k, you can apply for 400k*0.8-280k =40k line of credit. This is not that bad actually but the credit person on the phone told me that because I frankly told them I plan to use the line of credit to buy rental property. So when they process my application, they factor in mortgage that I will be responsible for from the new property. However, Wellsfargo credit analysis didn't factor in the extra revenue/income I could get from the new property. This omission of rental income blow through the require debt to income ratio and hence the primary HELOC was turned down.

• For the 2nd and 3rd property application, the 70-75% is actually 60%. So if my rental property is also worth 400k and loan balance is 280k, I can apply for 400k*0.6-280k= (-40k). That’s right, I can’t apply for anything because the equity/value of the home is not enough. Frustration.

• Say even if the calculation above shows that you have any amount left to apply for line of credit, it has to be above 20k for them to even consider your application. My guess is that since Wellfargo is paying for the closing costs and appraisal, they don’t want to deal with small line of credit.

So, I am back to square one and have to rely on personal saving, personal line of credit (also with Wellsfargo but that line is approved) and other creative financing approach to get more property. If anyone has good experience with other more investor-friendly banks who will at least add in additional rental income from the new property for any ratio calculation, I would love to give them a try. It is comical to me that Wellfargo is willing to give me a sizable personal line of credit backed by me and will not approve home equity line of credit backed also by me and physical house as collateral. Comical. Comical.

[Kyle J.]

Hey Daniel, a couple thoughts that came to mind while reading your post.  

If you know that you would use the money from the HELOC to buy more properties, have you considered just doing a cash out refi instead? You'd get more money since those are usually done at the 70-75% LTV (on investment properties) that you had hoped for. Plus the rate would be fixed and at a lower rate.

You probably already know this but HELOCs have variable rates which are determined by adding a margin to whatever the Prime Rate currently is. So if the margin is 1.875 (which is what Wells Fargo was using last I checked), and the current Prime Rate is 3.25%, then your APR will be 5.125%. This is within the APR range you mentioned, but keep in mind that it could theoretically go much higher if the Prime Rate were to rise to previous levels.

The down side to a cash out refi would be that your closing costs would be higher.  So you'd just have to factor that in and see if it would work for your particular scenario.

Also, regarding them factoring in the anticipated mortgage on the new property, it's probably too late now since they've already processed your application and factored that in, but in the future if you put that the reason for the HELOC is to "have cash reserves" then you won't have this problem. (This suggestion came straight from Wells Fargo.)

Best of luck to you.