Rental property loans and credit reporting advice - The Bills.com Blog

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Rental property loans and credit reporting advice

Question: I have 3 prime equity lines on 3 of my rental homes. They are being reported as RV loan type. They are interest only so the balances are not dropping. I think this is negatively impacting my score. Should the loan company report these as MTG since they are MTG loans?

Answer: Home equity lines of credit, or HELOCs, are not first mortgages, and are thereforenot reported to the credit bureaus as secured firtst mortgages. Both mortgages and HELOCs are secured by your real property, but unlike a primary mortgage, which pays out the full amount of the loan amount at the time of closing, a HELOC provides you with a line of credit against which you can borrow at your discretion, up to a predetermined credit limit.

You can think of a HELOC as a low interest credit card that is secured by your home. Like a credit card, your monthly payment is based on the amount of your available credit you have used. The repayment of home equity lines is divided into two periods, each with a different payment requirement. The ?draw? period, typically the first 15 years of the loan term, is the time that you can borrow money on your equity line?during this period, your monthly payment is usually interest only, meaning that your payment must cover the interest on your outstanding balance. During the ?repayment? period, typically the second

15 years, you will no longer be able to draw on the equity line, and your payment will be calculated to repay the balance of the loan by then end of the 15 year period. Because HELOCs provide you with a line of credit which you may use at your discretion, they are frequently categorized as revolving accounts. Therefore, it is appropriate for your lenders to report your home equity lines as revolving accounts.

However, if you would like the loans reclassified as non-RV loans (e.g. simply stated as a HELOC, or a rental property loan) you should contact your lender. I cannot guarantee, but I do not believe that this will have a significant impact on your credit score.

Credit scoring is too complicated a calculation for me to determine whether or not these loans are negatively impacting your credit score. If you have maxed out your available credit on the equity lines, they may be damaging your credit, as would any maxed out revolving credit account. If you are

able to pay down the principal balances on these credit lines, you may reduce the negative influence they are having on your credit score. Also, you may be able to refinance these notes into a mortgage. However, you should check with your lenders to make sure you will not run into pre-payment penalties or other fees for paying off the HELOCs early.

If you want to try to refi, Bills.com makes it easy to compare mortgage offers and different loan types. Please visit the loan page and find a loan that meets your needs at:
https://www.bills.com/mortage/refinance/

I invite you to view Bills.com site for more information about home equity lines of credit and home equity loans, available at http://www.bills.com/homeequityloan/

I hope this information helps you Find. Learn. Save.

Best,
Bill
www.bills.com

Also, make sure to get a free financial health check-up with Bills IQ!

User Comments

1. Posted by Rebecca Sutton on Wednesday 26th December 2007 18:58

Is it a way that I can open a business for my rental properties and not have my personal credit score (debt to income)reduced due to the properties?

2. Posted by FordB on Thursday 27th December 2007 06:24

Yes, Rebecca. You can theoretically open a new LLC (limited liability corporation) or new business and place all of your rental properties in there and then have the loans guaranteed by the business, and not you personally. This would allow the reporting to the credit bureaus to happen for the business and not you personally. Unfortunately, the reality is that if you are currently the person who took out the loans, then it is VERY unlikely that your lenders or banks will allow you to remove your personal guarantee from the loans. Meaning, while it is possible, it could be a challenge. I would recommend either contacting your current bank and asking them if this is possible... or apply for a large refinance loan to pay off the current loans and then get this new loan with your new business and see if it is possible to not have to personally guarantee the loans. Good luck. I hope this helps you (plus, there is a ton of great info on the www.bills.com website with advice on loans and credit). Cheers.

3. Posted by Luke on Thursday 3rd April 2008 01:39

I beleive the correct answer is if the balance on the HELOC is greater than $45,000 then it should be considered a mortgage not revolving. You should contact your creditor first and then the credit beauros to get this changed as you are correct a lot of revolving debt will have a much bigger negative impact on your score than if it were a loan.

4. Posted by bill on Thursday 3rd April 2008 07:25

thanks for the clarification Luke. that is good advice.

5. Posted by arnold_porter on Thursday 3rd April 2008 07:27

that last post is not correct, as your income (and consequently your debt to income) is not shown on a credit report. so any change to your credit report will not impact your DTI and all lenders look at combined DTI for a measure of ability to repay a loan.

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