HELOC for investing-limit lower than expected. Continue looking ?

Question

Hi all HELOC experts :)

We are in the process of getting a HELOC for our primary, to be used as cash-equivalent to fund investments. After shopping, we opted for one bank however they just came back to us with the proposed official limit - much lower than we anticipated ($400K which is way below 80% of our equity. 80% was the limit they "market" to us).

The question is - should we continue looking even though their other terms were quite good (0.25% + prime, interest only, introductory rate, low yearly minimum (to eliminate yearly fee, which in itself is quite low etc.)

?

Btw - the reason they gave us a low minimum is b/c during the shopping process, our credit score decreased to 716 from 770 from multiple hits (720 is their bar for a higher limit).

I am guessing other banks will not like this score either, and I understand it will take sometime until the score increases again.. which means if we dont take this HELOC we will need to possibly wait that period.

What do you think ?

Thanks

Ryan Gillette · Answer

The balance gets reported to the credit bureaus at the end of your billing cycle. So if the cycle ends Jan 10, whatever the balance is on the 10th, that's what will be reported. In theory you could pay it off on the 8th or 9th, and then start making purchases again on the 11th. But you put a lot of faith in the exact dates it's being reported to all three bureaus and you'd be cutting it very close. The best way is simply to pay it off today, and put it in a drawer for a few weeks until your credit is re-pulled. Use a debit card, cash, or only use so much of your card you can keep all the balances under 10% during this period until your credit is re-pulled.

Elad Messing · Answer

Thank you all. I will maintain a low CC balance and ask the bank if they will be willing to re-pull credit next month and re-evaluate.

Side note: Oh, the credit-score game.. I understand the purpose of the score, but it seems that too often the system is not tuned properly and forces us (and many others?) to play silly games in order to work the system. Frustrating

Elad Messing · Answer

@Kyle J. , @Ryan Gillette thank you both very much for explaining! I didnt fully understand how critical the impact of utilizing my credit cards is.

Is there any good practice you would recommend (outside of not using the CC :) ) to keep my CC balance low ?

(for example: Would simply paying down the balance to 10% a few days before the cycle do the trick ? Or maybe regular, multiple payments throughout the month ? )

Thanks

Kyle J. · Answer

From reading your second post here, I'd be comfortable saying that the number of credit inquiries is definitely not what lowered your score from 770 to 716.  It's just one (small) factor that was considered, but not likely the most heavily weighted factor.  (It's generally considered to have a "low impact" on your overall credit score.)

And your credit card limits are less important than your credit card utilization ratio.  Your credit card utilization ratio has a "high impact" on your overall credit score, and a 50% ratio isn't an ideal ratio to aim for.  Different companies look at your credit card utilization ratio differently, but here's one example of a matrix from Credit Karma to give you an idea of how this ratio is viewed:

0-9% = Excellent

10-29% = Good

30-49% = Fair

50-74% = Poor

75%+ = Very Poor

Many companies suggest keeping your ratio under 30%, and FICO has actually recommended keeping it below 10% if you can.  (According to a FICO survey "high achievers" -- those with a score north of 750 -- are only using an average of 7 percent of their available credit.)

The bottom line is, in general, the lower your ratio the better.  So I'd work on paying down some of your balances and see if your credit score doesn't go up noticeably.

Ryan Gillette · Answer

Your number one factor is outstanding balance. If you can, pay your balances down to 10% of the limit. It needs to be 10% by next billing cycle. If you simply pay it off now and re-rack up the balance by the next billing period, it will be reported with what it was at your next billing cycle. If you were 760 before, I wouldn't be surprised to see it shoot back up into that range. Unless it's a financial hardship, I would do it simply for what it would do to your pricing. I would go back to the LO and ask if it would change your pricing to have a 760 (if it doesn't, I wouldn't worry about it).

Elad Messing · Answer

Thanks @Ryan! The last credit report pulled by that bank specifically mentioned "Number of recent inquiries" as a new "key factor" which didnt appear on the previous report pulled from other lenders just a few weeks before that.. see below.

Also my CC limits are quite high, and i dont usually use more than 50% of that credit. I found it strange as well (heck, i am not the only one shopping for lenders) but, couldnt explain if differently ?

Kyle J. · Answer

A few thoughts.  First, you don't say if the amount they offered you would still allow you to do what you originally intended to do with it, but that should probably be your first consideration.  If it is enough, you may want to consider accepting it, even if it is somewhat less than you had hoped for.  Especially since you seem to be happy with all of the other terms of the HELOC.  On the other hand, if it's not enough, than you should keep shopping around until you find something that will work for you.

Second, and you probably already know this, but when a bank advertises that they'll do up to a certain percent for a HELOC (i.e. 70%, 80%, 90%, etc), understand that is their maximum.  Many other factors (i.e. credit score, DTI, etc) can reduce that percentage.  Sounds like that's what happened in your case.

With that being said, you might try to speak to the underwriter or the loan officer who worked on your application to get further details on how exactly they came up with the amount they offered you.  I once got offered a lower than expected amount on a HELOC, and when I inquired further about it I found that the underwriter incorrectly calculated my DTI.  When that was corrected, I got the amount I originally wanted.

Also, I'd suggest getting a copy of your credit report(s) to make sure everything is accurate on there and to confirm what's going on with your score.  Going from a 770 score to a 716 score for just shopping rates sounds like an awfully big drop.  According to the FICO website, credit inquiries generally only have a "small impact" on your credit score.  Additionally, with specific regard to "rate shopping", it states:

What to know about "rate shopping."

Best of luck whatever you decide.

Ryan Gillette · Answer

It doesn't hurt to make a few phone calls, or even call a mortgage company to see if they can refer you somewhere. They'll have their nose to your local market. $400K is a reasonable limit though. Taking second lien position, the bank opens themselves up to a lot of risk relative to their equity position.

Just for information, when you shop for a mortgage it all counts as one inquiry. It shouldn't affect your score 50+ points, even multiple pulls. Ask the LO to look at your credit. Typically, if there were no late payments to explain it, the culprit in these situations is a credit card with a balance that ballooned. Even a $400 balance on a $500 card will do some damage - $400 may be nothing to you, but it looks like you're using 80% of that line. The reason it may matter is a lot of banks have 720 score minimums - and it will affect your pricing (700+ vs 760+).

HELOC for investing-limit lower than expected. Continue looking ?

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