Board Topic: equity line used for downpayment
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equity line used for downpayment

Posted by: jlm1 Dec 9 2003, 04:51 PM
I currently own a home (2 years in) and would like to buy a bigger home.
Can I get a home equity line of credit and use it for a downpayment
on a new bigger home. I want to keep my existing home and use it as a rental.
I have no other cash for a down on a new home expect the equity built up in the existing.
What do you think of this?

Posted by: loanuniverse Dec 9 2003, 07:06 PM
Jlm1:

The answer is maybe!

Your situation as I see it {not being a residential lender} has two components.

First: You must make sure that you are allowed to do so under the terms of both your current loan and the home equity loan that you will need to get. The important clause that you need to cover is something called “occupancy clause” or “occupancy covenant”. This clause requires you to live in the house for a certain amount of time from the moment that the loan is granted. Chances are that you have already satisfied this clause on your first mortgage, but I have heard of some that last up to three years, you will need to check if the home equity line of credit has one.

The second component is the debt repayment. In plain English, the lender will want the sum of your income and your rental income to be enough to pay both the new loan, but also the first mortgage and the home equity line of credit payments for the original property.

The objective would be to get a lender with flexible terms and favorable ratios of debt coverage that need to be met.

Also if you could lease the original house, and show some history of rental payments before asking for a loan would show that the tenant is seasoned and this would give the lender a higher level of comfort.

Hope this helps.
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