LOE for cash-out Refi

[Jennifer Moraski]

We are in the process of refinancing an investment property that is a duplex. We owe $295k and it's worth around $675k. We'd like to pull out $100k to use for our next property. The lender is asking for a Letter of Explanation (LOE) with as much detail as possible on what we'll do with the funds. Can we say we'll use it for the down payment for another house hack or investment property or will that disqualify us? We've also thought about creating an ADU on the property from a large detached garage. If we say that's what we'll do, but then use the funds in another way, what could be the repercussions?

Appreciate any guidance!

[J Castro]

Quote from @Jennifer Moraski:

We are in the process of refinancing an investment property that is a duplex. We owe $295k and it's worth around $675k. We'd like to pull out $100k to use for our next property. The lender is asking for a Letter of Explanation (LOE) with as much detail as possible on what we'll do with the funds. Can we say we'll use it for the down payment for another house hack or investment property or will that disqualify us? We've also thought about creating an ADU on the property from a large detached garage. If we say that's what we'll do, but then use the funds in another way, what could be the repercussions?

Appreciate any guidance!

Hi @Jennifer Moraski—when a lender asks for a Letter of Explanation (LOE) for a cash-out refinance, they’re typically just trying to document the intended use of funds for underwriting and compliance purposes. In most cases, stating that the funds will be used for future real estate investment, purchasing another rental property, or property improvements is perfectly acceptable and very common among investors.

Many investors use cash-out refinances exactly the way you’re describing—to leverage existing equity to acquire their next property.

If you continue growing your portfolio, you may also want to look into DSCR investor loans, which qualify based primarily on the property’s rental income rather than personal income, making it easier to scale after the first few properties.

Best of luck with the refinance and your next investment!