Please Help, Formulating a Creative Finance Gameplan to help Personal Finance

[Timothy Ryan]

I own a home valued at 400k with 230k on a 30 year fixed FHA. Our debt to income ratio is too high due to student loans and a few credit cards hence the FHA. Also my credit score is not great right now due to some late payments and the low percentage of available credit versus outstanding credit. Originally I wanted to get a HELOC to fund my first deal but quickly realized that there probably wouldn't be enough money there to purchase outright and rehab. Obviously for the reasons mentioned above we wouldn't qualify for any conventional financing right now. So my new plan is to look for a 90% HELOC at around 5% with a 5-10 year draw period and interest only payments during the draw. Right now we have a monthly debt service on credit cards and student loans of $1,100 which total about $80,000 combined. I want to use the HELOC to pay off the credit cards and student loans essentially consolidating the debt into the HELOC. While this wouldn't necessarily help in lowering the debt to income ratio because i'm just moving the debt from one place to another, it would lower the monthly payments on those items down from $1,100 a month to around $300 a month. The next step would be to use hard money to fund 100% of the purchase price of my deal. I've set a minimum net return on investment of 35% on the deals I've been analyzing (that's after taxes). While that limits the pool, I simply won't accept lower numbers than that before I pull the trigger. I'll use hard money for the purchase, use HELOC to pay hard money points and rehab costs then sell the property. Use the gross to pay back the hard money, pay back the points and rehab costs to the HELOC, pay all closing costs/fees, agent commissions, and set aside money for capital gains tax. The entire net profit would then be applied to the HELOC thereby reducing the outstanding balance and further reducing our monthly payment. Then go and repeat the process until all debts are paid, debt to income ratio is well within guidelines, and then switch to a long term buy and hold strategy. Please let me know your thoughts on this game plan. I want to know if there are holes in the theory and what roadblocks might be expected.