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

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  • Jul 16th, 2010 5:10 pm
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[OP]
Newbie
Aug 15, 2008
17 posts
Hamilton, Ontario - …

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

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/show ... p?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.
27 replies
Deal Fanatic
Jul 1, 2007
8199 posts
1097 upvotes
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.
Banned
Jun 19, 2006
9349 posts
53 upvotes
Thalo wrote:
Sep 7th, 2008 8:15 pm
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)
Deal Fanatic
Aug 27, 2004
6593 posts
183 upvotes
Toronto, ON
AmongLions wrote:
Sep 7th, 2008 6:57 pm
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/show ... p?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.
Member
User avatar
Feb 27, 2006
329 posts
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.
Deal Addict
Feb 4, 2008
3132 posts
177 upvotes
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!
Deal Expert
User avatar
Jun 14, 2003
23140 posts
188 upvotes
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.
Too many people spend money they haven't earned to buy things they don't want, to impress people they don't like. -- Will Smith
Growing older is mandatory. Growing up is optional.
Stay hungry, stay foolish.
Deal Addict
Feb 4, 2008
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gman wrote:
Sep 8th, 2008 12:10 am
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.
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Jun 14, 2003
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sslinn wrote:
Sep 8th, 2008 12:23 am
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.
Too many people spend money they haven't earned to buy things they don't want, to impress people they don't like. -- Will Smith
Growing older is mandatory. Growing up is optional.
Stay hungry, stay foolish.
Deal Fanatic
Jul 1, 2007
8199 posts
1097 upvotes
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.
Deal Addict
Jan 11, 2004
4886 posts
466 upvotes
Victoria
gman wrote:
Sep 8th, 2008 1:15 am
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.
Not a political sig
Deal Expert
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Oct 16, 2001
76501 posts
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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)
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Apr 6, 2008
1605 posts
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Toronto
AmongLions wrote:
Sep 7th, 2008 6:57 pm
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/show ... p?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.
Pramod Chopra
Mortgage Alliance Co. of Canada
www.pramodchopra.com
Broker License # 10530
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Jun 14, 2003
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Wonderdollar wrote:
Sep 8th, 2008 1:16 pm
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.
Too many people spend money they haven't earned to buy things they don't want, to impress people they don't like. -- Will Smith
Growing older is mandatory. Growing up is optional.
Stay hungry, stay foolish.
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User avatar
Apr 6, 2008
1605 posts
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Toronto
gman wrote:
Sep 8th, 2008 2:14 pm
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.
Pramod Chopra
Mortgage Alliance Co. of Canada
www.pramodchopra.com
Broker License # 10530

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