Broker says no to using HELOC $$$ for downpayment!

[AmongLions]

Hey there people,

Wondering if you guys can help me out again?

I asked and got great answers to a previous question, see my other thread on HELOCs / Mortgages and Tax deduction - http://www.redflagdeals.com/forums/showthread.php?t=632012

I want to pick up a rental property, I have the 5% downpayment and I want to pull another 15% from my HELOC - so I can avoid paying mortgage insurance.

I spoke to my broker and she told me that I couldn't take money from my HELOC to use as a downpayment. She said I needed to prove that any money I use for my downpayment was from my savings account or comes from a family member.

I could borrow money from a family member (even though I'd have to say it was a gift), but I want a proper paper trail for tax purposes. I want to be able to fully account for the interest on the downpayment as well as the interest on my mortgage.

I own my own home free and clear, I don't have another mortgage and my credit card debt is minimal and fixed at 2% APR for a whole year.

So is this kind of refusal normal? My understanding is that it's supposed to be easy to use your HELOC in these circumstances. Should I be looking for another broker or am I missing something?

Thank you again.

[Thalo]

AFAIK it's okay to borrow against the equity in an existing home for the downpayment on another one. If that weren't allowed we might have never experienced a housing bubble like we did over the past few years, as it was entirely caused by overzealous baby boomers borrowing against their first homes and buying 2nd, 3rd, 4th, etc, houses as rental properties.

[pitz]

AFAIK it's okay to borrow against the equity in an existing home for the downpayment on another one. If that weren't allowed we might have never experienced a housing bubble like we did over the past few years, as it was entirely caused by overzealous baby boomers borrowing against their first homes and buying 2nd, 3rd, 4th, etc, houses as rental properties.

+1 (for truth)

[VivienM]

Hey there people,

Wondering if you guys can help me out again?

I asked and got great answers to a previous question, see my other thread on HELOCs / Mortgages and Tax deduction - http://www.redflagdeals.com/forums/showthread.php?t=632012

I want to pick up a rental property, I have the 5% downpayment and I want to pull another 15% from my HELOC - so I can avoid paying mortgage insurance.

I spoke to my broker and she told me that I couldn't take money from my HELOC to use as a downpayment. She said I needed to prove that any money I use for my downpayment was from my savings account or comes from a family member.

I could borrow money from a family member (even though I'd have to say it was a gift), but I want a proper paper trail for tax purposes. I want to be able to fully account for the interest on the downpayment as well as the interest on my mortgage.

I own my own home free and clear, I don't have another mortgage and my credit card debt is minimal and fixed at 2% APR for a whole year.

So is this kind of refusal normal? My understanding is that it's supposed to be easy to use your HELOC in these circumstances. Should I be looking for another broker or am I missing something?

That's weird.

When my parents wanted to upgrade their house, their banker actually suggested using HELOCs to finance the whole thing(which is what they did).

i.e.
1. max out HELOC on original house, pay for something like 50% of house #2
2. pay for the remainder of house #2 with a HELOC on house #2
3. once house #1 got sold 6 months later, have lawyer pay off the HELOC on #1 and give a cheque for the surplus amount
4. deposit cheque from lawyer at bank, and pay off part of HELOC on house #2
... and now whatever amount of money is left owing is on the HELOC of house #2 at prime and can be repaid as quickly/slowly as they want.

[potato]

That is strange.
I have done that with my last couple investment properties.
They didn't care where the money came from, once you have a HELOC in your name they can see it as debt load.

Maybe they are being more strict because of the meltdown in the States.

[sslinn]

As long as you debt service the LOC there should not be an issued with using your line of credit. I would ask the broker again about using your LOC, because you can!

[gman]

The broker should not even know where the money comes from. She knew because you told her. You write a cheque which is the same as a regular cheque.

If you really really want to make it not traceable "easily", write yourself a LOC cheque and deposit to your chequing account and then write a cheque from your chequing account.

[sslinn]

The broker should not even know where the money comes from. She knew because you told her. You write a cheque which is the same as a regular cheque.

If you really really want to make it not traceable "easily", write yourself a LOC cheque and deposit to your chequing account and then write a cheque from your chequing account.

Careful giving such advice. Lenders want to know where downpayments come from. Supplying a 90 day history of the bank account that holds the downpayment is common place.

[gman]

Careful giving such advice. Lenders want to know where downpayments come from. Supplying a 90 day history of the bank account that holds the downpayment is common place.

Well, I don't know such thing. I purchased 2 condo and a house. Lender never asked me for anything regarding the down payment. In fact, all 5 cheque I wrote for the down payment of a new condo this year are all LOC cheques. And, the only cheque I used in the past 15 years are ALL LOC cheques.

[Thalo]

It is important for the lender to know the source of the downpayment so you do need to tell them you're using equity in an existing house. This is perfectly fine as long as your ratios are in line, as someone else already mentioned.

Problems arise when someone uses unsecured debt for repayment. Then, essentially, the borrower's total loan to value goes above the max allowable. For instance purchasing a $200K property with a $40K downpayment from a ULOC would be the same as purchasing with a 0% down mortgage but no CHMC insurance. If you use a HELOC then you're only encroaching on the 80% that you're allowed to borrow against that property to purchase the new property. Having your primary residence leveraged to 80% loan to value and the investment property to 65% is still conventional mortgages.

[dealguy2]

Well, I don't know such thing. I purchased 2 condo and a house. Lender never asked me for anything regarding the down payment. In fact, all 5 cheque I wrote for the down payment of a new condo this year are all LOC cheques. And, the only cheque I used in the past 15 years are ALL LOC cheques.

Thus shattering the myth of the conservative canadian lending standards.

[Spidey]

I did it this time last year just becaue our house wasnt sold yet. So it was allowed. I really didnt want to, but had to due to the situation, etc. Then when my old house sold I just paid of the HELOC.

Was extra intrest, but thats just the way it went. I had to jump through a lot of hoops though to do the double mortgage thing for awhile, had to provide written current employment confirmation for both our jobs, numerous credit checks, etc, etc. Was alot of work, but worked out in the end (thankfully)

[Wonderdollar]

Hey there people,

Wondering if you guys can help me out again?

I asked and got great answers to a previous question, see my other thread on HELOCs / Mortgages and Tax deduction - http://www.redflagdeals.com/forums/showthread.php?t=632012

I want to pick up a rental property, I have the 5% downpayment and I want to pull another 15% from my HELOC - so I can avoid paying mortgage insurance.

I spoke to my broker and she told me that I couldn't take money from my HELOC to use as a downpayment. She said I needed to prove that any money I use for my downpayment was from my savings account or comes from a family member.

I could borrow money from a family member (even though I'd have to say it was a gift), but I want a proper paper trail for tax purposes. I want to be able to fully account for the interest on the downpayment as well as the interest on my mortgage.

I own my own home free and clear, I don't have another mortgage and my credit card debt is minimal and fixed at 2% APR for a whole year.

So is this kind of refusal normal? My understanding is that it's supposed to be easy to use your HELOC in these circumstances. Should I be looking for another broker or am I missing something?

Thank you again.

As suggested by Thalo and some other senior members, as far as your GDS and TDS are in line and your credit is fine, you can most certainly take out money from your HELOC for the purpose of down payment. In fact, if you can, you should take the whole 20% from HELOC and that way you would be writing off the whole interest on your HELOC and the interest portion of your mortgage payments during tax time.

Do not listen to some one who says that you do not have to tell the source of your funds to your broker or the lender as it is certainly required by the lenders to know the source of down payment and the lenders are absolutely fine with money borrowed from the HELOC for the purpose of buying investment property so long you qualify based on your income and credit and the GDS and TDS are in line.

I think its time for you to contact the bank directly or change your broker.

[gman]

As suggested by Thalo and some other senior members, as far as your GDS and TDS are in line and your credit is fine, you can most certainly take out money from your HELOC for the purpose of down payment. In fact, if you can, you should take the whole 20% from HELOC and that way you would be writing off the whole interest on your HELOC and the interest portion of your mortgage payments during tax time.

Do not listen to some one who says that you do not have to tell the source of your funds to your broker or the lender as it is certainly required by the lenders to know the source of down payment and the lenders are absolutely fine with money borrowed from the HELOC for the purpose of buying investment property so long you qualify based on your income and credit and the GDS and TDS are in line.

I think its time for you to contact the bank directly or change your broker.

If they never ask, do you have to tell them? I never said one should lie.

[Wonderdollar]

If they never ask, do you have to tell them? I never said one should lie.


I would be very much surprised if the mortgage broker or the lender does not ask for the 3 months history of the source of down payment. But if both of them do not ask, which is questionable though, I suppose you do not need to tell. Of course, one should not lie on the mortgage application.

[gman]

I would be very much surprised if the mortgage broker or the lender does not ask for the 3 months history of the source of down payment. But if both of them do not ask, which is questionable though, I suppose you do not need to tell. Of course, one should not lie on the mortgage application.

Three times. Never asked once. Never heard of "3 months history". Never know anyone was asked for that either. I asked around in the office. Nobody heard of that or was asked for that.

[freebrokerhelp]

The rule of no borrowed down payment applies if you have a score of 680 or lower. But this doesn't apply if not going through an insurer like CMHC. You can use your HELOC as long as your TDS (debt ratio) is under 42%.

[Neil]

The broker is technically correct. The principle of a downpayment is that you actually have some financial stake in the property, a stake that is not borrowed. By borrowing the downpayment, then borrowing the rest, technically you don't have a financial interest.

Consider that the property could drop in value. What if you found yourself owing $200,000 on a property that's worth only $150,000? What's to stop you from defaulting and leaving the mortgage lender holding the bag?

With the usual way, where someone has a 20% downpayment, the lender is better protected. Your $200k property would only have $160k owing. So if you default and they have to liquidate it for $150k, they only lose $10k instead of $50k.

Revenue propertes have stricter standards than primary residences, for a whole list of reasons that should be obvious.

In short, you having a non-borrowed downpayment is evidence of your credit worthiness, it gives you a financial reason for you not to default, and it protects the lender.

This is a principle many lenders probably glossed over during the times of rapidly rising markets. But in current conditions, they are paying much closer attention.

In your case, it sounds like you have 100% equity in another property. The mortgage broker may be applying the common principle to your new property without understanding or realizing your overall situation.

You could advance the downpayment from your other HELOC, but fully disclose it as a borrowing obligation, with balance and monthly payment amount of course. If doing this causes your cash flow or debt service ratios to rise to a risky level, that's a warning sign you may be over extending yourself.

[VivienM]

Consider that the property could drop in value. What if you found yourself owing $200,000 on a property that's worth only $150,000? What's to stop you from defaulting and leaving the mortgage lender holding the bag?

With the usual way, where someone has a 20% downpayment, the lender is better protected. Your $200k property would only have $160k owing. So if you default and they have to liquidate it for $150k, they only lose $10k instead of $50k.

But let's say you have $160K owing on a mortgage with bank #1, plus your $40K down payment was borrowed from another bank (bank #2) on an unsecured personal LOC (so a riskier situation than the one in this thread). If you go bankrupt, the $40K owing is bank #2's problem, not bank #1's....

[mapleleafsforever]

As long as you debt service the LOC there should not be an issued with using your line of credit. I would ask the broker again about using your LOC, because you can!

You can use any source of funds to make the downpayment on another house.

[oyster_777]

Time to change brokers who give bad advice...

[Neil]

But let's say you have $160K owing on a mortgage with bank #1, plus your $40K down payment was borrowed from another bank (bank #2) on an unsecured personal LOC (so a riskier situation than the one in this thread). If you go bankrupt, the $40K owing is bank #2's problem, not bank #1's....

Actually a borrower having all kinds of debt to various creditors IS of concern to bank #1. It affects not only your ability to make regular payments, but another creditor to compete with them in the case of default.

I agree in an extreme case where the buyer's equity is high, a lender might be inclined to think that in the case of a default, the collateral will more than cover the loan. But that isn't how they do things, and certainly of late that's not an exception they'd be interested in making.

[coolcoolfi]

Time to change brokers who give bad advice...

Agree. HELOC is secured and you should be able to use as much as you want. Remember, RELOC is above 20% of your total home value.