HELOC for BRRRR, will it affect my DTI for the refinance?

Question

Hi all, I'm looking to start a BRRRR project soon and I'm considering using my HELOC for financing the project. I have a HELOC with $140k and interest of 4.13% (variable) and about 50k cash. So I know a lot of you rely on private/hard money lenders, but my thought is that the interest rate in the HELOC is so low that it will save me tons in holding cost. Once the refinance is complete I can pay back the HELOC and hopefully recoup most of my cash.

I've thinking about it and my only concern would be that borrowing from the HELOC will affect my DTI and cause issues with the refinance, any thoughts? For the record my credit is around 800, I have no debt (other than my primary residence) and I have a stable w2 job with great income.

I appreciate the help.

Colby Fryar · Answer

@Juan Castro I have refinance a number of my properties over the past few months and had no issues with a HELOC on the books. But again it does depend on the income coming in-  the DTI has to be up.

Julee Felsman · Answer

@Brian Gerlach Hey there. :)@Juan Castro many of the comments above are spot-on. when you refi, you can use the proceeds of the refinance to pay down/pay off the HELOC, lowering or eliminating the impact it has on your DTI. Very common strategy! And if you have any worries about qualifying for the eventual refi, just connect with your lender-to-be and put together a file to "prequalify" for the refinance. That should put your mind at ease. (I do this with my clients frequently. It gets ahead of so many potential issues and lets you do some strategic planning for what's next.)

Juan Castro · Answer

@Blake Dailey I hadn't thought about opening a commercial line of credit, that's a good idea too. However, for now I will continue with my original idea of using the HELOC. Thank you for your valuable information!

Juan Castro · Answer

@Joe P. Thank you for the advice. I do need to be proactive and not reactive. I will start the conversation with my lender to make sure I got all my ducks in a row. I think everything will be good but it will give me that piece of mind.

Blake Dailey · Answer

It sounds like based on your personal situation the HELOC wouldn't hurt your refinance. You could always open a commercial line of credit with your LLC so that it is off of your personal DTI. If not, once you take the money out of your HELOC to use on the BRRRR, it will count towards your DTI. But based on your personal situation with low debt, high income, and great credit you should be fine. Another option could be to refinance with a commercial loan if a residential lender does have issue with your DTI. If you don't go above 50% with the new proposed mortgage it shouldn't be a problem.

Juan Castro · Answer

Thank you @Brian Gerlach and @Julee Felsman for the insightful information. It is good to know that the HELOC balance will be removed because it will be paid off through the refinance cash out. I did not know this. Thanks for sharing.

Brian G. · Answer

@Brian Gerlach @Julee Felsman is my answer above correct? Just double checking with a pro!

Brian G. · Answer

@Juan Castro yes a balance on a Heloc affects your DTI based on the monthly payment. However, the lender should be able to remove that payment from your DTI calculation for the refi if you are paying off the Heloc as part of your refi. The DTI calculation should be based on your financial obligation *after you refinance and not before*. You just need a knowledgeable lender.

Nick Ferrari · Answer

Yes a HELOC is factored in as debt to you personally but with that being said you should be fine.  The industry standard for most mortgage companies is not allowing an individuals DTI  exceed 43% and that's for the approval of a conventional loan.  So if you have no debt at all you should be fine.  Even then it all 'depends' on your situation for example how is it possible that some people own hundreds of properties wouldn't that create a massive amount of debt for the individual and not allow them to borrow any longer?  Well your relationship with your lender can go a long way, if you have a proven track record of success and continue to finance your mortgages with them every time you do that you're building more assets with them and putting more and more money in their pockets so they make look the other way in the future at your DTI if you can execute on your end.

Whitney Hutten · Answer

@Juan Castro Great idea, Juan!  Just let them tell you what you needs and don't hesitate to ask deeper questions. Will the HELOC affect DTI? Yes. However, you probably could have title pay off your HELOC with any cashout funds as part of the deal if it comes to that.

HELOC for BRRRR, will it affect my DTI for the refinance?

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