How Do Credit Lines Work?

I know several land buyers who use a "credit line deed of trust" to buy more properties. The banks allow them to borrow up to x amount of dollars, and the credit line is secured by other properties that the borrower owns. Could someone explain how the lender determines the amount of the line of credit? Thanks, Brad

Comments(3)

  • pspiers25th May, 2004

    The lender will use a LTV ratio. Typically for an open credit line secured by raw land the lender wants a 65% LTV. For example, if you have a property worth $100k then you should be able to get a credit line up to $65K. Note, everything is negotiable and it is possible to get better deals on credit lines.

  • sayana25th May, 2004

    Hi:
    I have one principal residence which is paid for and I have got a LINE OF CREDIT against that one. I also have
    nine rental single family homes and
    my equity in each of them is 20 % which
    I paid as down payment at the time of closing in each case.
    My question is can I get a Line of Credit
    against the nine rentals I own through mortgages ????
    sayana rolleyes

  • active_re_investor25th May, 2004

    Two types of 'credit lines'

    Unsecured. I have one. Not that large. Not secured against anything other then my word to pay. Interest rate floats and is not as low as a mortgage. If I do not pay the lender can try to force bankruptcy but they stand in line with all the other unsecured creditors (credit cards are unsecured mostly).

    Secured. I have one. Higher amount of credit. Secured against a property. Rate is much lower but still floats (credit line in second position). If I fail to pay they can collect by foreclosing on the property. No need to force a bankruptcy from the lender's point of view.

    Lenders do not want to have a default. They will limit their risk. Unlikely you will get a credit line in 2nd position on a rental that is already at 80% LTV from the first.

    John
    [addsig]

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