Using home equity loan for downpayment on investment property

[Jayme Mendal]

Hi - I'm new to the site, and wanted to jump right in by posing a question for the community...

I would like to acquire a property, but am short $20-30K for the downpayment. That said, I have $300K+ equity in my primary residence. Is it possible to (and/or advisable to) draw a home equity loan against my primary to bridge the shortfall for the downpayment and help me acquire the property? Any alternatives or red flags I should be thinking about?

Any thoughts or suggestions on this would be much appreciated!

[Karen Schimpf]

@Andrew Bosworth, @Anthony Vann, @Brandon Heimsoth, If ALL your liquidity (down payment, closing cost and reserves) come from your HELOC, than you will need to mitigate the loan to strengthen the deal. Some things to mitigate and strengthen the deal would be like: experience owning other 5+ units, your personal income cash flows the deal, your putting down more than 25%, the property debt service is higher than 1.25 etc.

[Jeff Rabinowitz]

Originally posted by @Brandon Heimsoth:

Jeff Rabinowitz why do you say this (HELOC for down payment) shouldn't be done with properties under LLCs?

The HELOC is probably on your personal residence (mine was). I don't put my rentals under LLCs but if I did, transferring funds frequently (or maybe even once) between the LLC account and the HELOC could erode the dubious value of the LLC. It could make the LLC even easier to pierce than they usually are.

[Karen Schimpf]

@Anthony Vann and @Brandon Heimsoth, I have answered your question of why not use a HELOC for a down payment a couple of times but my response is not posting. If all your liquidity (for down payment, closing cost and reserves) comes from a HELOC and you do not have investment experience, than the file will need to be mitigated for strengths to overcome your liquidity issue. Some strengths that would mitigate your liquidity would be things like the property debt service ratio is higher than the bare minimum of 1.25 or you are putting more than 25% down on the purchase of the property etc. Hope this helps.

[Karen Schimpf]

@Anthony Vann, @Brandon Heimsoth, @Michael Barbari, If you do not have experience as an investor and all of your liquidity is coming from a HELOC for your down payment, closing cost and reserves; than we would need to mitigate the property and your strengths. An example of some mitigating factors could be that you are putting down more than 25% to buy the property,or the property's debt service is greater than the bare minimum Debt Service Ratio of 1.25, etc. Lenders like local banks etc. will do a global debt service which would look at the HELOC debt which could impact your global debt service to be too high. Hope this helps. Sorry for posting this twice but was having difficulty posting.

[Anthony Vann]

@Karen Schimpf Thank you for the response. I wonder if this is lender specific though. I've talked with some brokers who don't mention the mitigating factors that you do. It could also be because I've talked with them about both a line of credit and just a regular home equity loan. The financing stuff is the most difficult for me to grasp about investing. Never was good with math.

[Jonathan Hughes]

Originally posted by @Anthony Vann:

Originally posted by @Michael Barbari:

@Andy Collins @Karen Schimpf

Your statements are not correct. You are allowed to use your home equity for downpayments. There is no need to pull it out and waste 2 months of interest parking it in an account.

 Can anyone elaborate on this at all and possibly give a real life example?

 I would agree and would like to understand that statement as well. I know they look at 2 month of statements but why would you not need to for a heloc as a downpayment?

[Karen Schimpf]

@Jayme Mendal, Are you acquiring a 5+ unit or less? It will depend on the loan product.  I would talk to your loan officer to ask if it would be acceptable for you to utilize your equity for the short fall.  Some loan products have a global debt service.  The additional loan could make your debt too high which could impact your qualifying ratios.  Once again talk to your loan officer to make sure.

[Casey Rutherford]

@Brandon Heimsoth did you ever get a response (or find elsewhere) re: why a HELOC for down payment shouldn't be used with an LLC? Thanks in advance!

[Nicholas Q.]

Originally posted by @Anthony Vann:

Originally posted by @Michael Barbari:

@Andy Collins @Karen Schimpf

Your statements are not correct. You are allowed to use your home equity for downpayments. There is no need to pull it out and waste 2 months of interest parking it in an account.

 Can anyone elaborate on this at all and possibly give a real life example?

I'd like some clarity on this too. If my DTI is low enough, why does a bank care if my down payment comes from another loan?

[Albert Bui]

HI Jayme,

Its perfectly fine to draw a HEL or HELOC (home equity line of credit) against your primary to buy other real estate because from a lenders eyes we consider this "borrowers funds."

The only caveat will be that you will have to factor the HEL or HELOC payment into your debt to income ratios (DTI) so make sure you do the calculation or your lender helps walk you through that calculation so that there are no issues on the upleg purchase transaction.

You can take a longer term on your HEL to stretch out that principal and interest payment or use a HELOC to lessen the DTI load since HELOC's typically are interest only(IO). IO payment will have a much lower payment to factor in when buying your upleg purchase transaction (in most cases).

[Albert Bui]

Originally posted by @Anthony Vann:

@Karen Schimpf Thank you for the response. I wonder if this is lender specific though. I've talked with some brokers who don't mention the mitigating factors that you do. It could also be because I've talked with them about both a line of credit and just a regular home equity loan. The financing stuff is the most difficult for me to grasp about investing. Never was good with math.

The reasoning you're hearing what you're hearing from Karen is she is a commercial lender in title so yes she's concerned with Global DCR, DCR, networth, liquidity, debt to equity ratios, etc and other terms associated with that side of lending.

Commercial 5+ has fannie and freddie as well, however 1-4 unit residential fannie and freddie is a different ball game when it comes to qualifying.

[Albert Bui]

Originally posted by @Nicholas Q.:

Originally posted by @Anthony Vann:

Originally posted by @Michael Barbari:

@Andy Collins @Karen Schimpf

Your statements are not correct. You are allowed to use your home equity for downpayments. There is no need to pull it out and waste 2 months of interest parking it in an account.

 Can anyone elaborate on this at all and possibly give a real life example?

I'd like some clarity on this too. If my DTI is low enough, why does a bank care if my down payment comes from another loan?

 Its simple the lender is trying to make an assessment of your ability to pay and if they are assessing your debts to determine this; they don't want you to have "undisclosed," liabilities or borrow money else where as that may endanger their ability to get repaid as promised.

[Account Closed]

The major consideration is can you afford it.   SO SIMPLE its genius!

[Hai Vu]

I'm getting a HELOC to purchase a second home that would be my primary.  I told the banker that I will use the money for a downpayment for a new home.  She didn't mention anything about this not being allowed.

-Hai



Originally posted by @Anthony Vann:

Originally posted by @Michael Barbari:

@Andy Collins @Karen Schimpf

Your statements are not correct. You are allowed to use your home equity for downpayments. There is no need to pull it out and waste 2 months of interest parking it in an account.

 Can anyone elaborate on this at all and possibly give a real life example?