Financing in Palo Alto>Question Details

WantToBuy, Home Buyer in Palo Alto, CA

Pay Off HELOC?

Asked by WantToBuy, Palo Alto, CA Tue Jul 19, 2011

I want to buy a new house soon. I have a HELOC on current house with $2000 balance($60K limit, $400 monthly due). I'm keeping the current house. Will pay it off help new house mortgage application, in teams of both credit score and new loan affordability?

I assume it'll allow me to borrow more, but may affect my credit score. Not sure how long I need to wait after paying off so the affordability and credit score changes.

Thanks!

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Answers

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It will help you qualify for more - as lenders will either use the payment listed on the credit report or a % of the credit limit (more lenders are just going by the payment listed on the credit report these days). $400/mo may affect your purchasing power, so if paying off a $2k balance can happen it may be worth it. You do not need to close it though, just paying it off will eliminate it's payment. Paying it off may also help your scores too, but going from 3% utilization to 0% utilization probably won't help you but more than a few points, paying it off should not lower your credit scores. If you close it, then that may hurt your scores, so I would not recommend you do it at this point.

If you have any further questions please let me know and I'd be happy to answer them.
1 vote Thank Flag Link Tue Jul 19, 2011
If it's not broken, don't fix it. If you need to make corrective measures you will know this when you receive the underwriter's conditional approval. Or, if you don't qualify for the dollar amount and $400 a month in less debt will help then do something.

I'm assuming you income is such that you can qualify with both PITI payments. If not, you will need 30% equity in the vacated property to count 75% of rental income into your debt-to-income ratio.
Web Reference: http://www.umboc.com
0 votes Thank Flag Link Tue Jul 19, 2011
I respectfully disagree with previous comments; however, will acknowledge that the underwriting criterial may vary lender to lender. Usually a underwriter will use a 1% payment calcuation of the entire credit line for purpose of qualification. The rationale is that you could pay off the HELOC to qualify and then charge up to the full 60K after buying your new home.

The use of the 1% payment calculation was ALWAYS used until the advent of the lax credit guidelines of the early 2000's. I would qualify with the 1% payment and verified with underwriting that they certainly would use the same calculation.

I would agree that closing the line may impact your credit score so I would proceed with caution. Freezing the line and/or reducing it (if necessary) may be acceptable to an underwriter. Again, lenders may vary on this issue; however, I would error to the side of caution and get complete and accurate information prior to making an offer on a home. Many lenders will not fully underwrite your file until you have entered into a purchase contract. A 1% payment on a 60K HELOC could adversely affect your qualifications if the underwriter disagrees with the consultant's preapproval.

Best of luck to you!
0 votes Thank Flag Link Tue Jul 19, 2011
I respectfully disagree with previous comments; however, will acknowledge that the underwriting criterial may vary lender to lender. Usually a underwriter will use a 1% payment calcuation of the entire credit line for purpose of qualification. The rationale is that you could pay off the HELOC to qualify and then charge up to the full 60K after buying your new home.

The use of the 1% payment calculation was ALWAYS used until the advent of the lax credit guidelines of the early 2000's. I would qualify with the 1% payment and verified with underwriting that they certainly would use the same calculation.

I would agree that closing the line may impact your credit score so I would proceed with caution. Freezing the line and/or reducing it (if necessary) may be acceptable to an underwriter. Again, lenders may vary on this issue; however, I would error to the side of caution and get complete and accurate information prior to making an offer on a home. Many lenders will not fully underwrite your file until you have entered into a purchase contract. A 1% payment on a 60K HELOC could adversely affect your qualifications if the underwriter disagrees with the consultant's preapproval.

Best of luck to you!
0 votes Thank Flag Link Tue Jul 19, 2011
Shane is right, you may also want to talk to your lender after you pay it off. Some lenders may ask you to freeze the account. They ask this so you are not able to pull from it after you have been approved with a certain amount of debt.
0 votes Thank Flag Link Tue Jul 19, 2011
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