Refinancing 4 unit Primary into Invesment

[Jared Schweiss]

Hello All,

I recently bought and moved into a quadplex 4 months ago. After renovating and renting three of the units (while living in the 4th unit), I am wanting to refinance to pull out some equity and lower the interest rate. 

I initially put down 20% on a primary residence loan. I am now looking to refinance into an investment loan so I can move out and buy a new primary residence to move into (utilizing some of the pulled-out cash as well). 

Can I refinance and pull out 85% and keep down only 15%? Or is 20% or 25% the lowest possible down payment on an investment loan? I understand I could do primary residence and do a 5% or even 3.5% down, but I do not want to be stuck living in the unit another year. 

Can someone recommend a lender they have worked with who would refinance for 15% if possible? 

I'd greatly appreciate any recommendations or suggestions on how i could go about this process differently. 
If more details are necessary let me know!

Thanks, 

Jared

[Tim Swierczek]

@Jared Schweiss

I'm disappointed in the lender's replies to this message. I see you are from Minneapolis so I wish I had seen your post earlier. You received a lot of factually incorrect information. I don't think one lender gave you a correct answer.  Alas, here is the correct answers in bold below with proof:

I recently bought and moved into a quadplex 4 months ago. After renovating and renting three of the units (while living in the 4th unit), I am wanting to refinance to pull out some equity and lower the interest rate. 

- When refinancing there are guidelines about how long you must own the home after purchase before you can refinance and take cash out. Those guidelines are referred to as seasoning. If you want to refinance to take cash out on an investment property you would need to do a conventional loan, conventional loans require 12 months of seasoning. This means you must be the title owner of the property for 12 months until you can use the appraised value of the property.  Based on your post it looks like you have owned it less than 12 months but seasoning is an important point.  There are other loan types that have different seasoning timelines. I will mention them below. 

Here is the proof, it is Fannie Mae's guideline but Freddie Mac's guideline mirrors Fannies on this issue. The requirement was a forced change by the FHFA which oversees both Fannie & Freddie. https://selling-guide.fanniemae.com/sel/b2-1.3-03/cash-out-r...

I initially put down 20% on a primary residence loan. I am now looking to refinance into an investment loan so I can move out and buy a new primary residence to move into (utilizing some of the pulled-out cash as well).

- No, you can't -See the answer above and further explanation on LTV below

Can I refinance and pull out 85% and keep down only 15%? Or is 20% or 25% the lowest possible down payment on an investment loan? I understand I could do primary residence and do a 5% or even 3.5% down, but I do not want to be stuck living in the unit for another year.

-You cannot do 3.5% because that is an FHA loan, FHA has always (my whole career of 22 years) had a 12-month seasoning requirement to use the appraised value. In addition, FHA's Max LTV on Cash out Refinances is 80%, not the 96.5% it requires for purchase and rate/term refinances. FHA's site couldn't be less consumer-friendly but here is the proof you must scroll to Section V.(B).1.a Here's the link but for your sanity, I have copied and pasted the relevant info below the link.

https://www.allregs.com/tpl/Search#q=cash%20out%20refinance

v. Cash-Out Refinances

(B) Maximum Mortgage Amounts

(1) Standard

(a) Maximum Loan-to-Value

The maximum LTV is 80 percent of the Adjusted Value.

-It's most frustrating to me that every licensed loan officer who answered the question got the LTV wrong.  How can professionals get such a basic answer incorrect?  First, they all missed that the MAX Cash Out LTV on any refinance of a 4-plex is 75% and that's if its owner occupied. If it's an investment you must subtract another 5% (some got that part of the answer correct but not the starting point of 75%). This means your Max LTV if you refinance as an investment property is 70% and you can't use the appraised value before 12 months. I usually reference Fannie Guidelines when they mirror Freddie because they are generally more consumer-friendly but Freddie's LTVs are laid out better, Proof below:

Fannie Max LTV https://singlefamily.fanniemae.com/media/20786/display
Freddie Max LTV https://singlefamily.fanniemae.com/media/20786/display

Can someone recommend a lender they have worked with who would refinance for 15% if possible? -Self-promotion is not allowed in the BP forums, but any good investment lender who can answer these questions can help you.

I'd greatly appreciate any recommendations or suggestions on how I could go about this process differently.- Your options are to either wait out the 12-month waiting period and refinance into an investment property loan using a conventional loan or look for a non-conventional loan. Or as @Erik Estrada mentioned above you can get a HELOC. I know a lender that will do a 95% HELOC on a primary residence 1-4 unit provided your DTI is 43% or lower.  That lender will only use the purchase price for the first year. There may be others that don't have 12-month seasoning but I'm not aware of them at this time. PM me if you haven't found a solution and we can chat.

Lastly, as far as non-conventional loans go there are options although most do require 12 months of seasoning. I know that https://www.creativelending.biz/ offers investment property loans on stabilized properties with no-seasoning if the DSCR is 1.3 or better. You would not be allowed to be living in the property to get this loan. You must be moved out prior to approval. Again,reach out if you want to chat.

[Devin Peterson]

Quote from @Jared Schweiss:

Hello All,

I recently bought and moved into a quadplex 4 months ago. After renovating and renting three of the units (while living in the 4th unit), I am wanting to refinance to pull out some equity and lower the interest rate. 

I initially put down 20% on a primary residence loan. I am now looking to refinance into an investment loan so I can move out and buy a new primary residence to move into (utilizing some of the pulled-out cash as well). 

Can I refinance and pull out 85% and keep down only 15%? Or is 20% or 25% the lowest possible down payment on an investment loan? I understand I could do primary residence and do a 5% or even 3.5% down, but I do not want to be stuck living in the unit another year. 

Can someone recommend a lender they have worked with who would refinance for 15% if possible? 

I'd greatly appreciate any recommendations or suggestions on how i could go about this process differently. 
If more details are necessary let me know!

Thanks, 

Jared

Hi Jared, realistically how much equity have you built in the last four months since you’ve closed? Did you purchase with an FHA or conventional loan? Regardless, you can only do cash out up to 80% LTV of the existing value of your property you’ve also cannot refinance into investment property until you establish a different address as your primary residence. Max leverage for cash out on investment properties is reduced by 5% to 75 LTV. 

[Erik Estrada]

You would need to wait at least a year before you can move out and rent your primary residence. 

You could look into doing a HELOC on a primary residence instead and then move out after you have lived there for a year. Most lenders can go up to 80-85% CLTV as long as your DTI allows it.

[Jaron Walling]

Echoing what @Devin Peterson said... unless you put a lot down, purchased below market, renovations substantially increased value, or better yet a combination of all that he wouldn't have enough equity to refinance. You'll need a signed lease for the 4th unit (all the units probably) to prove you no longer live there and want to buy another primary residence. Cheers. 

[Derek Brickley]

Hey Jared! As already mentioned, trying to refinance into a investment loan might not be the most beneficial. Other than wanting to buy another property, you would need a concrete reason for not living in the property for one year. In addition, the cost to cash-out refinance an investment property at 80 LTV probably would be beyond ATR/QM limits. Unfortunately, a cash-out refinance as an investment industry-wide would not be at 85 LTV. When using primary residence loans, you are sadly restricted with how quickly you would be able to scale.

My initial thoughts: What type of property would you be looking to buy as a primary residence?  If you have a justifiable reason for buying a new primary, then it may be possible.  I would not recommend refinancing that 4-unit at all.  As I mentioned before, the cost to do so would be extreme and your interest rate would be higher.  You don't need to refinance out of the primary residence loan to buy another primary, but the other seasoning applies.

[Tim Swierczek]

@Jared Schweiss

I'm disappointed in the lender's replies to this message. I see you are from Minneapolis so I wish I had seen your post earlier. You received a lot of factually incorrect information. I don't think one lender gave you a correct answer.  Alas, here is the correct answers in bold below with proof:

I recently bought and moved into a quadplex 4 months ago. After renovating and renting three of the units (while living in the 4th unit), I am wanting to refinance to pull out some equity and lower the interest rate. 

- When refinancing there are guidelines about how long you must own the home after purchase before you can refinance and take cash out. Those guidelines are referred to as seasoning. If you want to refinance to take cash out on an investment property you would need to do a conventional loan, conventional loans require 12 months of seasoning. This means you must be the title owner of the property for 12 months until you can use the appraised value of the property.  Based on your post it looks like you have owned it less than 12 months but seasoning is an important point.  There are other loan types that have different seasoning timelines. I will mention them below. 

Here is the proof, it is Fannie Mae's guideline but Freddie Mac's guideline mirrors Fannies on this issue. The requirement was a forced change by the FHFA which oversees both Fannie & Freddie. https://selling-guide.fanniemae.com/sel/b2-1.3-03/cash-out-r...

I initially put down 20% on a primary residence loan. I am now looking to refinance into an investment loan so I can move out and buy a new primary residence to move into (utilizing some of the pulled-out cash as well).

- No, you can't -See the answer above and further explanation on LTV below

Can I refinance and pull out 85% and keep down only 15%? Or is 20% or 25% the lowest possible down payment on an investment loan? I understand I could do primary residence and do a 5% or even 3.5% down, but I do not want to be stuck living in the unit for another year.

-You cannot do 3.5% because that is an FHA loan, FHA has always (my whole career of 22 years) had a 12-month seasoning requirement to use the appraised value. In addition, FHA's Max LTV on Cash out Refinances is 80%, not the 96.5% it requires for purchase and rate/term refinances. FHA's site couldn't be less consumer-friendly but here is the proof you must scroll to Section V.(B).1.a Here's the link but for your sanity, I have copied and pasted the relevant info below the link.

https://www.allregs.com/tpl/Search#q=cash%20out%20refinance

v. Cash-Out Refinances

(B) Maximum Mortgage Amounts

(1) Standard

(a) Maximum Loan-to-Value

The maximum LTV is 80 percent of the Adjusted Value.

-It's most frustrating to me that every licensed loan officer who answered the question got the LTV wrong.  How can professionals get such a basic answer incorrect?  First, they all missed that the MAX Cash Out LTV on any refinance of a 4-plex is 75% and that's if its owner occupied. If it's an investment you must subtract another 5% (some got that part of the answer correct but not the starting point of 75%). This means your Max LTV if you refinance as an investment property is 70% and you can't use the appraised value before 12 months. I usually reference Fannie Guidelines when they mirror Freddie because they are generally more consumer-friendly but Freddie's LTVs are laid out better, Proof below:

Fannie Max LTV https://singlefamily.fanniemae.com/media/20786/display
Freddie Max LTV https://singlefamily.fanniemae.com/media/20786/display

Can someone recommend a lender they have worked with who would refinance for 15% if possible? -Self-promotion is not allowed in the BP forums, but any good investment lender who can answer these questions can help you.

I'd greatly appreciate any recommendations or suggestions on how I could go about this process differently.- Your options are to either wait out the 12-month waiting period and refinance into an investment property loan using a conventional loan or look for a non-conventional loan. Or as @Erik Estrada mentioned above you can get a HELOC. I know a lender that will do a 95% HELOC on a primary residence 1-4 unit provided your DTI is 43% or lower.  That lender will only use the purchase price for the first year. There may be others that don't have 12-month seasoning but I'm not aware of them at this time. PM me if you haven't found a solution and we can chat.

Lastly, as far as non-conventional loans go there are options although most do require 12 months of seasoning. I know that https://www.creativelending.biz/ offers investment property loans on stabilized properties with no-seasoning if the DSCR is 1.3 or better. You would not be allowed to be living in the property to get this loan. You must be moved out prior to approval. Again,reach out if you want to chat.