Loans Answers

Home equity line of credit for flipping properties

Question: Young investor wants me to mentor him on flipping. He proposes obtaining a 100% LTV home equity line of credit on his primary residence to finance his ventures.

He desires interest only payments.

His credit score is high 700s with stable job history.

Are these loans actively being made? If so, what type of interest rate sould he expect to pay?

Answer: The key word to the original post was a loan on his “primary home”.

Depending on what the balance and rate are on the 1st mortgage of his primary owner-occupied home, he may be better off refinancing and getting a cashout loan on the 1st . 2nd mortgage and home equity loan rates are always higher than first mortgages, so with a smaller home equity loan, he wouldn’t be paying a higher rate on a larger loan but on a smaller loan amount.

There are interest only programs called Option Arms I would stay away from. They can start out as low as 1% (teaser rates) and you have the option of paying interest only or the fully amoritized payment or have a payment cap which would result in a negative am balance which would be recast down the road. What many lenders don’t tell you that affects the future increases are the margins that are added on the the index (usually the TBill, Libor or 11th District Cost of Funds). With good credit scores, margins usually range from 2.50 up.

My recommendation is to go with a Fixed Rate or something like a 5/1 Arm with an interest only feature for the first 5 years. With a good credit score he can get a good rate and not pay through the nose for closing costs. Naturally the rates are more to begin with but your friend will be far ahead in the long run. There is definitely more to obtaining a loan than just the inital start rate. I see too many people who have fell into that trap and now they can’t handle the spike in their payments.

Another thing your friend needs to know about flipping. If his buyer needs financing and your friend has bought the property and is now selling it under a 12 month timeframe and can’t account for his increase in selling price by cost of improvements, most lenders will only lend on the seller’s original purchase price. No one needs these surprises.

Here’s an actual case I had this spring. Had a referral on financing an investment property. The borrower told me that the seller bought the property at foreclosure. I asked how much, she didn’t know. I asked when the seller purchased the property and was told about 3 months prior. She faxed the sales contract to me. Red flag, the seller was an LLC. I looked up the seller’s LLC on the State Sec of State web site. The LLC was dissolved 6 months prior. I called up the county Clerk of Court’s office to find out the foreclosed sale price. Actually was bought prior to foreclosure from the troubled sellers for $35,000 less than the selling price to my borrower in a 3 month period. No improvements or anything to justify a $35,000 increase in 3 months. Knowing the seller was a defunct LLC I couldn’t make the loan on that basis and also with the $35,000 difference with no supporting docs, my borrower did not have to go through the expense of paying for an appraisal only to find out that the appraisal would have disclosed the issues at a later time. If the borrower seeks financing from a lender, the appraiser is required to disclose any recent sales history on the subject property.

Hope this helps your friend. If I can be of service in the future……..http://www.windsorcap.com/jnewton EMail jnew…@mortgageloansolutions.net

Related Posts

• Investing for your kids…
• Advice Needed for First Time Buyer
• CARELTON SHEETS – ANY SUCCESSFUL STUDENTS OUT THERE ?
• need objective help-bankruptcy or credit counseling?
• Foreclosure and Home Equity Line
• About Foreclosure
• I wonder how badly I was burned…
• Advice on possible consolidation/equity loan (LONG)
• Good for your instructor
• Off topic – reporting bad credit
• prefer saving
• The Real Solution to Mortgage Problems

Filed under: Home Equity Loan