Renew HELOC - Debt to income ratio too high

[Don Jackson]

Hello BP folks,

I currently have a HELOC that is 10 years old and is expired (I can't take any more money out of it, just pay it down). It is with Chase bank. They contacted me and asked if I want to get a new HELOC. My home has gone way up in value and has a lot of equity in it, so I thought this would be a great opportunity to get a much bigger HELOC and start buying some new investment properties. My plan is to get the down payments out of the new HELOC. I have cash, but I've learned (the hard way) to always have a cushion in my real estate bank account.

It turns out that my debt to income ratio is too high because of the current mortgages I have. One on my home and three on rental properties. I can easily pay more in payments, but there are new stringent policies in place since I purchased my properties in 2007. I'm self employed so that's another strike against me.

I guess my question is: should I shop around for a HELOC with other banks or are they all going to have the same formula and say that my debt to income is too high? Is there any other way to use the equity in my home to help me buy a few more income properties?

Thanks for any thoughts

[Mike H.]

Is your DTI ratio too high because of the mortgages or is it simply too high?

If its simply too high, then I don't think there's a whole lot you can do. Most banks giving out HELOCs will have some form of DTI ratio requirement.

But could it be that the bank is calculating the DTI incorrectly because they don't know how to account for investment property correctly in the formula????

I've had several issues in the past with banks not knowing how to calculate the DTI. I literally had to explain to them why their calculation was wrong.

Here's the last example that happened recently:
The bank counted my mortgage payment on the properties as debt payments. Then they credited the net income from my tax return for each property.

I had to spend about an hour explaining to them that they are not doing that correctly.
If they're counting the mortgage payments on the debt side, then they should be adding that back to my net income.

Here is what they were doing: If my mortgage payment is $500, taxes and insurance is $400, repairs $100 and rent is 1,400. My net income was $400 on my return. My payment on my credit report was $500. So it was dinging my DTI ratio $100 a month in the red.

In reality, they were counting the $500 payment against me twice.  My net income was $400 only because it was already pulling out the $500 a month payment. So the real net was $400 a month plus in income.

The lesson is that there are banks out there that simply have no clue how to calculate the numbers on investment properties. So be sure you're checking their work.  Its happened to me three times now. And I've had to ask them to show me their numbers and then had to explain to them why what they were doing was wrong.

If your DTI is really high, then your best bet is to try local banks again as portfolio lenders. If they can keep it in house they might be able to swing it. I have a buddy that was also self employed and had a nice chunk of equity in his home as well. Nobody would do it though because of his tax return and lack of reportable income.

He went to the commercial lender and he was able to get the loan done there as they're able to look at the reality of the business income instead of the absolute numbers of a tax return.