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HELOC on old home <--> Mortgage on new home, order of operations

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  • HELOC on old home <--> Mortgage on new home, order of operations

    Planning to move to a new house, and keep the old one as a rental. We want to take out a HELOC and use that cash to redo some core items - decks/roof/etc prior to renting it. Probably looking at 3-5 months until we are ready to purchase a new home and take out a new mortgage.

    So, from a numbers perspective, should we get a HELOC first, and apply for a mortgage in a few months? Or wait to apply for a HELOC on the original house until after we secure financing on new home?

    Would opening a HELOC first, lower our credit score / DTI ratio in such a way to negatively impact our financing on new home, even if we don't pull any cash out until after we secure a mortgage on new home?

    If we secure a mortgage on a new home and move, can we still take out a HELOC on our former home that we intend to rent? Or will it not be eligible if no longer primary residence?

  • #2
    First question. Did you run the numbers on the proposed rental home to see how it pencils out as a business in terms of cash flow, net operating income, and total projected rate of return both before and after taxes?

    Second, in answer to your question about order of financing actions, as a real estate investor you need a team. I suggest you find a high quality mortgage broker who knows all of the ins and outs of financing for a real estate investor. That person is an invaluable team member who will guide you through all of the steps you mentioned, and in the correct order.


    • #3
      Many underwriter will count full HELOC even if no balance to the D:I ratio.


      • #4
        Think about how much total debt you'd like to be in for the purchase of your new home, and how much you'd like to put has down payment. Then find the best loan for your purposes. If a HELOC is part of your loan/mortgage solution, I would get it established well ahead of time. You don't want to be scrambling last minute to get your HELOC set up so that you can use it for your down payment.


        • #5
          “Probably looking at 3-5 months until we are ready to purchase a new home and take out a new mortgage. ”

          Your planned actions will determine your order of financing. You cannot get a mortgage commitment before you are ready to buy a house.
          Your rehab and mortgage needs determines that.

          Your credit score is not influenced by D/I. It is influenced heavily by credit used / credit available.
          Mortgage approval is heavily influenced by D/I.
          Keep in mind, when signing you will be required to disclose any substantial changes. Probably doesn’t impact rate as much as compliance with the bundling of your mortgage. That mortgage approval has a time limit. Rehab takes longer or house hunting takes longer, many unknowns.

          Probably best to keep your ultimate goal, total loan and payments as your goal. You won’t like the results if you end up in a bad place. Changing facts and circumstances change behaviors of lenders.