Denied for HELOC due to lack of credit history

[Ken J.]

Hi,

I am considering obtaining a HELOC to purchase a second property (ideally for investment purposes). I have applied with Chase and a local credit union and have been rejected for lack of credit history. I own my current 2 family home free and clear as it was bought with cash. Further, my income is sufficient (i.e., above average) and that was never cited as a problem. I had a small amount of student loans (i.e., less than $10K), which I paid off within 3 years after graduating college and purchased a car (less than $28K), which I paid off within 4 years. I don't have any credit card debt as I pay my bill in full every month.

A couple of questions:

1. What should I do as my lack of credit history appears to be a problem with whichever lender I go to?

2. Does it hurt my credit history if I go from lender to lender applying and getting rejected for similar reasons? Is there a certain amount of time that I should wait before I reapply elsewhere for a HELOC or should I try and apply with various loan institutions for a HELOC within a short time period (i.e., 1 month period)

3. If I get rejected, is it worth speaking with the loan officer and seeing if they would be willing to extend me a HELOC for a lower amount than I had initially requested?

4. Reason for HELOC - would "wanting to purchase investment property" an acceptable reason for obtaining a HELOC? If not, please advise as to what would be most appropriate.

In case helpful, I live in the NY metro area. Many thanks in advance for your responses.

[Michael Garofalo]

Hi Ken,

I obtained a HELOC against my primary residence here in the DC area several months back. I can't speak to what the conditions are like in NY, so take all of this with a grain of salt. I'm sure more seasoned investors than myself will have more to add, but hopefully the responses below give you some clarity.

1) Perhaps the reason they are rejecting you isn't truly a lack of credit history. If you have credit cards and obtained previous student loans as well as a car loan, that's a pretty diverse set of liabilities to prove your credit-worthiness. Did they site anything in particular or were they extremely vague?

2) To the extent that each lender will run a hard credit pull, yes it certainly will. Too many inquiries will negatively impact that score. I'd recommend to only apply at banks you are really serious about. Have preliminary conversations with them to see what their requirements are as well as the terms of their product (i.e. draw period, floating interest rate as it relates to prime, repayment schedule, annual fee, and closing costs) before you start forking over all kinds of financial documents.

3) Most banks will go with 80-90% LTV, which means they will take that percentage of the appraised value and subtract it from your outstanding mortgage to determine the credit line. In your case you own the property free and clear, so for simplicity sake let's say the property is worth $500,000. At that price, and if the bank is willing to lend @ 80% LTV, you should expect to receive a credit line of up to $400,000. If you had $100,000 in principal left on the note, you should expect to receive a credit line of up to $300,000

4) I wouldn't play this card with the big banks. In fact, I wouldn't even waste your time with the big banks. Go into a smaller local bank, and tell them your story. If you are organized, present yourself in a professional way, and speak intelligently (i.e. you understand how the HELOC works amongst other forms of bank financing), someone will take you seriously. Banks usually don't care what you use the HELOC for so long as they are protected in the event of default