Hello, We need some advice. Gearing up to purchase a new home as soon as we sell our existing home. I own a rental property free and clear. I was thinking about taking out a HELOC on the property to use as a down payment when we purchase our new house. I plan on buying a new home only AFTER we sell our existing house. My question is if I apply and take out a HELOC on the rental property now, how will if affect my FICO scores? We have worked hard during the past year to raise our scores and I am concerned that the HELOC would lower my scores right before I go for financing on a new house. My current FICO(s) are in the low 600 range and climbing on a monthly basis. Thanks for your help! Brucey
The first issue is whether you can secure a HELOC w/decent terms w/ a FICO score in the low 600s. Most banks look for 700 +/- for a HELOC. As to the effect on your credit score, it is a mix of variables. Most likely your score will increase due to overall lower utilization rate (provided you don't use the HELOC). However, timing is everything, and watch the details of the HELOC. Many institutions require you to take out an initial amount. You can take the check from the banker's desk, and walk over to the teller and deposit it back, but...the initial reporting on your CRs could show the "used amount" of the credit line. So, monitor the reporting of the HELOC TL in line with your mortgage application. Next, you must be watchful of how the CRAs report the HELOC. Some list them as "revolving accounts (like CCs), some as "installment loans" (like a mortgage/auto loan). How it is labeled is important to your score(s).
In my experience, HELOCs are reported as revolving accounts - meaning its use will be treated just like a credit card. If they issue a credit card with your HELOC, it will most definitely be scored as a credit card. That means that using your HELOC for a downpayment will affect your overall utilization and have an affect on your score. If you can make the dp without exceeding 15% of the HELOC, then it won't affect your score much at all. When your overall utilization exceeds 15%, 30%, and 50%, your score takes a hit each increment. When you use 80% or so of a single credit line, you take an additional hit for being close to your limit, and when overall utilization hits 80%+ you can have another hit on top of everything else. I've been double-banged before for both overall and individual utilization issues. Bottom line: If your HELOC is much larger than the rest of your tradelines together, then the use of it will pretty much dictate your overall utilization. If you max it out to make the downpayment, your score can easily drop 40-50 points and more immediately upon reporting. (Personal experience there)
I know this is a few months old, but I'm just reading backwards ;-). You write, that you're only planning on buying a new house after you sold the present one. 1. When you sell your present one you will have to pay off your HELOC, as it's tied to the equity of your present house. Subsequently, that HELOC is no longer in existence by the time you buy another house. 2.If you meant, that you're planning on buying another house once you have a contract on your present house, then that's a different situation. BUT, a ton of things can go wrong between contract and closing. In fact, you can sit at the closing table and something may come up that will derail the sale. So, if you really need equity out of your present house in order to buy another one, then I would suggest to make an arrangement with any potential buyer of this house, that they will let you rent this house for a week after closing. THat will assure you that your sale went through and you have the actual cash to do the closing on the next house
I'm not sure you can get a HELOC on a rental property, and the deductibility of interest might be questionable. Why not just get a mortgage on the rental house? The rate will probably be lower, the term could be longer (you can always pay it off early, but watch the prepayment penalities), therefore your payments will be lower. It will also show as a mortgage rather than as a credit card.
