Looking for first deal — HELOC + Pre-approval, what comes first?

[Allie Dattilio]

We are in the process of searching for our first deal. (Looking for SFH or duplex for under $100k, with under $30k in rehab needs) We plan to take out a HELOC for the down payment and initial rehab costs. Would love to find an owner financing deal, but realize that may be too good to be true. So assuming we will attempt to get a conventional mortgage, what order should we do things... pre-approval and then HELOC, or vice versa, at the same time (if we went through same bank), or does it not really matter? Additionally, since we are looking for fixer uppers, in what conditions would a bank not cover a house with a mortgage? (Other than the minimum $50k)

[Chris Mason]

Originally posted by @Michael S.:

Wouldn't it make more sense to get the pre-approval first that way when he identifies the target property and puts an offer in he can tie it up, do 14 or 21 day loan contingency and use that time to secure the loan? Otherwise if he gets the HELOC he will be making payments when he hasn't even identified the property yet. Am I right or am I missing something?

 You are missing a LOT!

HELOCs take for-freaking-ever to close for average creditworthiness people. The underwriting for a 2nd position mortgage is 2x as conservative as a 1st position mortgage, due to risk (HELOCs are in 2nd position). Frequently the REI/consumer applies to 3 or 5 different HELOC lenders before a credit line is actually opened -- the better rate HELOC has higher standards, so REI/consumers go through this time-exhaustive exercise of getting denied a bunch because the 4 best rate HELOC lenders denied them, it's not until the 5th that it's approved and open. The person taking the HELOC loan app isn't a full time loan originator, they are a minimum wage bank teller on welfare and food stamps with a NMLS or NMLSR, so they just tell the consumer "oh that's great! it'll be fine!" even though the person has a 0.00% chance of being approved (in the off chance that it does, maybe there's $250 in it for them... but it costs them $0 if it doesn't!). So, a month each with the bank teller, times five. I see that you are a real estate agent. Will your client on your current listing wait around in escrow with all contingencies in place for six months while the buyer mucks about with this HELOC nonsense? If they will, then frankly you should probably fire yourself and tell that seller to work with an LA listing agent that I'll happily refer them to. :P

Also, why would you be "making payments" on a HELOC with a balance of $0? No matter the interest rate... $0 times anything is... $0.

Getting the HELOC is essentially just a hack around saving up a down payment. You need the down payment/HELOC before being preapproved. How can you get preapproved with no down payment? If you were to refer me a client, do you want me preapproving them and telling you they are good to go when in reality they have $0 towards any form of down payment and can't even afford an EMD or appraisal fee, much less lunch? 

HELOC, or save a down payment, first.