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My wife and I are moving across the country for a new job, and are evaluating the possibility of using an existing HELOC from our current home as a down payment on a home we will be buying. Any thoughts would be appreciated.
Here's some (hopefully) relevant facts:
Five years ago, my wife put roughly two-thirds of the price of our current home (approx. $80K) down in the form of her own cash.
Not what I would have done, but we weren't married at the time and she viewed it as a sort of enforced savings plan. In fairness, in the Spring of 05 dumping mounds of cash into your home as enforced savings could be justified by the conventional wisdom that real estate approached the solidity and soundness of a bank account.
Anyway, the only way the mortgage company (GMAC) would write a loan for the remaining third was to include a HELOC for roughly the same amount (40K). My wife drew the full amount from the HELOC and paid it back in full two weeks later. It hasn't been touched since, and still has a zero balance. The margin on the HELOC is 1 point over prime.
Technically this would almost certainly violate the terms of your HELOC, as the lender does NOT want you to use the equity in one property to secure a replacement at low HELOC rates when this involves the high risk associated with a bridge loan.
The lender on the new home would also stand to to get screwed if it turns out that the first home takes longer to sell and the borrower ends up over extended on two properties...
All that being said, the practical why for either lender to REALLY prevent this are limited, as you have plenty of time to "clean" this money with some old fashioned account openings / transfers...
To be safe the best way to do this involves consolidating your debts, using another bank that is NOT involved with either deal, and doing this with enough lead time to adequately age the dough.
Technically this would almost certainly violate the terms of your HELOC, as the lender does NOT want you to use the equity in one property to secure a replacement at low HELOC rates when this involves the high risk associated with a bridge loan.
The lender on the new home would also stand to to get screwed if it turns out that the first home takes longer to sell and the borrower ends up over extended on two properties...
All that being said, the practical why for either lender to REALLY prevent this are limited, as you have plenty of time to "clean" this money with some old fashioned account openings / transfers...
To be safe the best way to do this involves consolidating your debts, using another bank that is NOT involved with either deal, and doing this with enough lead time to adequately age the dough.
Why would it violate the terms of the HELOC? A HELOC does not usually restrict what you can do with the proceeds.
We were able to use our HELOC to release the equity in our current home so that we can close on our new home before we close on our current home. We did not lie to anyone about what we were doing.
As long as you qualify to carry all the loans the bank may not have a problem with it. If you won't qualify to carry your current mortgage, the HELOC and the new mortgage then you will not be able to do it.
Call up a bank and say you want to obtain a HELOC on your primary residence in order to buy new real estate and see what they say, most prohibit it. After you get the HELOC and use the money as a down payment, there is little recourse they'd have other than call the HELOC due and payable immediately, which would be taken care of when the home that has the HELOC sells. Plenty of my past clients have done this and the new purchase money mortgage we've helped them obtain has no issue, and it's not my place to make sure the client is informing their HELOC lender what the proceeds are being used for, it's completely up to the borrower.
Call up a bank and say you want to obtain a HELOC on your primary residence in order to buy new real estate and see what they say, most prohibit it. After you get the HELOC and use the money as a down payment, there is little recourse they'd have other than call the HELOC due and payable immediately, which would be taken care of when the home that has the HELOC sells. Plenty of my past clients have done this and the new purchase money mortgage we've helped them obtain has no issue, and it's not my place to make sure the client is informing their HELOC lender what the proceeds are being used for, it's completely up to the borrower.
I did not see anything in my HELOC documentation that prevents it. This was not a new HELOC that was obtained specifically for this purpose. I have had it in place for a few years. How would the HELOC lender even know what I did with the money? We close next Friday.
MERS registration of the new mortgage, amongst other ways. I'm not saying there will surely be an issue with what you are doing, and the HELOC lender may likely never find out at all... but I am saying that there could be an issue. It'd be irresponsible of me not to bring it up.
MERS registration of the new mortgage, amongst other ways. I'm not saying there will surely be an issue with what you are doing, and the HELOC lender may likely never find out at all... but I am saying that there could be an issue. It'd be irresponsible of me not to bring it up.
The part I don't get is why it would violate the terms of the HELOC? There is nothing that I know of that restricts my use of the money. I don't think the bank can stop me from taking the money and gambling it all in Las Vegas, buying a diamond ring, paying tuition for school, or putting it down on a house.
You are correct that the lender cannot prevent you from doing something irresponsible with the proceeds from the loan, lack gambling, and it may very will have been that there was explicit mention of the "do it yourself bridge finance" in your HELOC, but. MOST lenders have added this, some with amendments to existing HELOCs.
As Shane points out if the lender wanted to protect themselves they could call the loan and your deal might fall apart. I mention this to warn folks of the possibility.
I practice I have heard of only a tiny number lenders enforcing this, and then in cases where it was pretty clear that the borrower was setting themselves up to really abuse a HELOC that was on a grossly over valued property, but the clause is now common and it could cause a deal to unravel...
You are correct that the lender cannot prevent you from doing something irresponsible with the proceeds from the loan, lack gambling, and it may very will have been that there was explicit mention of the "do it yourself bridge finance" in your HELOC, but. MOST lenders have added this, some with amendments to existing HELOCs.
As Shane points out if the lender wanted to protect themselves they could call the loan and your deal might fall apart. I mention this to warn folks of the possibility.
I practice I have heard of only a tiny number lenders enforcing this, and then in cases where it was pretty clear that the borrower was setting themselves up to really abuse a HELOC that was on a grossly over valued property, but the clause is now common and it could cause a deal to unravel...
Wouldn't they have had to tell us that they changed the terms of the HELOC? Also-the HELOC owner is the same bank that we are using for our new mortgage. When we applied for the loan we told them that we wanted to do this so that we could avoid temporary housing/storage and they were the ones who said it was ok in the first place.
I am worried that the underwriter is a moron though. My husband is self employed and today she asked him for written verification of employment......Ummmmmmm.
If the lender has suggested this then that would ee my mind. Agin odds of all but the slippery deals getting tripped up by this are slim...
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