Have you been considering taking out a line of credit on the built up equity in your home to buy a vacation property or perhaps your first investment property (ie. – duplex)? Well, if you do, be sure to understand what is needed with respect to accessing that line of credit BEFORE you get to closing. Most people think that since the line of credit is with a bank that it will act like a regular bank account and allow for cashier’s checks or wire transfers to be obtained.
Well, you’d be wrong. During my own stressful and harrowing experience back in May when I purchased a 4-plex in Wichita, KS, I learned that while a line of credit can be darn handy for household additions or remodels – those little checks pay off a lot of things! – you can’t use them the same way when you’re dealing with a banking transfer of funds. We just had an investment client go through this too and it was helpful that I could walk him through pretty much exactly what he needed to do to get a bank manager to help him out.
Instead of going through the steps of what to do when it goes wrong let’s instead focus on what to do to prevent the problem:
1. Be sure your line of credit is accurate about balances available.
2. Pre-determine what you think you’ll need for down payment and closing costs at least 2 weeks prior to closing. Your Good Faith Estimate (GFE) provided by your 1st position mortgage (if there is one) should give you a fair idea of what is needed.
Example: you’re buying a $200,000 property with an 80% 1st mortgage and the 20% will come from your LOC. We already know that you’ll have a $40,000 down payment. Typically, you’ll see a range of closing costs from 1.75% to maybe 3.5% but sometimes closing costs can go as high as 7% of your loan amount. So, for this example, let’s say your lender estimated closing costs to be 3% so that would be $200,000 x .80 = $160,000 loan with 3% based on that loan amount (LOC’s won’t have a closing cost in this example if you’ve already set it up in advance of the purchase). Now we have $160,000 x .03 = $4,800. Final tally: $40,000 + $4,800 = $44,800.
Line of credit checks ARE NOT what bank’s consider “certified funds” like a wire transfer or cashier’s check would be. They are handled like a credit card because it is a revolving line of credit and if you write a check and put it in your bank account it will be held for up to one week (give or take) by your bank before funds can be accessed.
3. This is why it is VERY IMPORTANT to do this upwards of 2 WEEKS PRIOR TO CLOSING because you’ll have to wire your funds (or get a cashier’s check) to close to the escrow company at least 24 hours or more in advance of closing (WA State and KS State experience only here, check your local state for their closing guidelines).
Don’t get stuck and have to do the run around that I did in a state where I don’t live and without access to ANY of the banks I normally use. While it’s good experience to help out clients like I did the other day, I certainly don’t recommend it.
Conversely, if you’re a seller it makes sense to have your agent find out what the terms of the purchase will be with regard to financing to make sure there isn’t a delay at closing due to an issue like this one.
