Great LOC, but I needs some ??? answered please:) - Posted by Mark Sweeney, Fremont, Ca

Posted by LJ on January 11, 2002 at 08:18:59:

I have asked this question twice recently and it seems that nobody wants to deal with this. Perhaps we have found the ‘catch’ in the much-glorified LOC plan. My bet is that this purchase-on-LOC-then-refi idea is limited to a scant few people who can pull it off. Many have said it is not for someone without a track record and this is true. Besides a track record, Id wager you have to be quite rich or have a huge income to cover the debt ratio.
It is a big concern that one might get the LOC, buy a 50K property with it, then NOT be able to refi it into a mortgage because he has too much unsecured debt(and not an enormous income).
Since asking about this theory got no real responses, maybe this post that “it probably can’t be done by most of us” will provoke a rebuttal and explanation. I’d LOVE to get a great answer to this problem. Please, people, if one exists…lets have it!

Great LOC, but I needs some ??? answered please:) - Posted by Mark Sweeney, Fremont, Ca

Posted by Mark Sweeney, Fremont, Ca on January 10, 2002 at 22:31:44:


I just got back from my credit union today inquiring about a Home Equity Line of Credit. Tentatively I have been approved for 90K against one on my rental properties. I told the loan officer that my plan was to use the funds to buy distressed SFHs @ 75% FMV less rehab cost and then put on a new 80% conventional loan after completing th renovation @ 10% down 15% cash out.

I asked him if this Hone Equity Line of Credit being open would prevent me from qualifying for a new conventional loan due to debt ratios. He really could not give me straight answer, but did say that we maybe able to assure the new lender that the Hone Equity Line of Credit would be closed out with the refinance. Is this a potential problem? My concern is that the loan is interest only with a balloon due in 15 years and I may not be able to qualify for the new conventional loan due to debt ratios and do not want to sell.

Loan details

Loan amount 90,000.00
Est. Nonrecurring Closing Cost 3749.00
Est. Prepaid items 1487.00
Payment 15 years @ 4.75% 356.25 (Interest Only)


Re: Great LOC, but need some ? answered please:) - Posted by Ed Garcia

Posted by Ed Garcia on January 11, 2002 at 12:36:40:


I’m sorry I’ve been busy and have not been giving the board the attention that I normally do. Also to LJ, if you are reading this, I’ve answered this question many times and it’s really self-explanatory.

First of all, for a Home Equity Line, you don’t have to give the lender a complete brake down of the use of the money because the line is secured with your home. If you want to use the money to go to Vegas? That’s your business.

Secondly, any time you borrow money, the loan is calculated into your debt service. In your case, your line is for $90,000, so if you only borrow $10,000 against the line, the lender would figure the payment against the full $90,000. The reason being is because you have access to the remainder of the balance and with a stroke of the pen, you have it.

Obviously if you should refinance your house, you will have eliminated the second mortgage or Home Equity Loan and it would not be figured in your new income to debt ratio. However your new debt ratio would be determined upon the amount financed and of course terms and conditions.

If you wish to refinance the first and leave the Home Equity Line in second position, you could ask your second mortgage holder who has given you your Home Equity Line to subordinate to a new first. In most cases if you are doing a rate reduction with no cash out, they have no problem with that.

Mark, let there be no mistake that whenever you make a move with your financing it will affect your debt ratio one way or another.

So if it will prevent you from qualifying for another loan or not, is contingent on your ratios.

Ed Garcia