Cashout Refinance Subject TO

19 Replies

  • I Bought a house subject to 6 months ago. Closed at a title company I Have the deed I own the house I am looking to pay off the existing mortgage that is not mine. I am looking to do a cash out refinance. Can this still be done now? I am having a hard time in my area with lenders understanding what I am trying to do. One stated continuity of obligation issue the other said I have to have 6 months to a year payment history. Can I refinance? As I plan to keep this property as owner occupied now that I fixed it up. Thanks 
Originally posted by @Chris Miller :
  • I Bought a house subject to 6 months ago. Closed at a title company I Have the deed I own the house I am looking to pay off the existing mortgage that is not mine. I am looking to do a cash out refinance. Can this still be done now? I am having a hard time in my area with lenders understanding what I am trying to do. One stated continuity of obligation issue the other said I have to have 6 months to a year payment history. Can I refinance? As I plan to keep this property as owner occupied now that I fixed it up. Thanks 

 There ARE continuity of obligation rules that your subject to since you're considering a refinance and you're not Obligated on the current underlying mortgage (subject-to mortgage from seller).

The rule states that if you dont qualify for one of the rules under COB that your maximum LTV is limited to 50% LTV for all refinances within 24 months from the date of acquisition. You can cash out after 6 months from date of acquisition, but only up to the limited LTV restriction of 50%. Unless there is significant equity in the property 50% LTV may not be enough to payoff the current underlying mortgage.

Now here are the exceptions to lift the COB 50% limited LTV restriction:

- you inherit the property and it was transferred into your name either via legal award from a domestic partnership/marriage 

- you have been on title for 24 + months

- you took title to the property that was transferred from a partnership or partnership like entity (LLC, LP, etc) that you can document the ownership of 25% or more in

- you lived in the property and have been on title for atleast 12 months as a primary residence

- you have paid the mortgage for atleast 12 months 

- or you can demonstrate a relationship with the obligator (domestic partner, relative, family member, etc. )

If you qualify for one of the exceptions you are not limited to the 50% max LTV when considering fannie/freddie conventional cash out refinances on a subject to transaction. The most relevant exceptions are the last three above in bold.

Theres a lot of noise about the topic and its very confusing but the above are the actual rules atleast regarding conventional fannie/freddie financing. 

Originally posted by @Matt Santos :

Great incite @Albert Bui I am marketing toward Subject To prospects and I have never seen this particular topic regarding refinancing sub to brought up before. I appreciate the info.

Matt

 Of Course Matt, Nice to see you're from Kitsap county, WA.

The Sub2 & Refi strategy has been something I've been looking at as an investor and loan officer as well and this topic just happened to have come up. Being able to refinance out is just one of the exit strategies and its good to know how long you have to pay on the underlying mortgage to be able to take out the current obligation. Sometimes you may not want to take out the current underlying mortgage though, in cases where the underlying mtg has better rate/terms than the new proposed loan options.

Thank you for your reply Albert. With trying to refinance with conventional seems to be difficult to do with 6months title seasoning if the LTV can only be 50% because of the continuity of obligation you mentioned. If that is the case then why are lenders still asking me for a payment history even though " I am not obligated to pay" . However it seems to be different if you have title for 1 year and go FHA you then can refinance with out worrying about continuity of obligation. I still would like to hear from anybody who has ever refinance a SUBJECT TO deal. It seems it should work with conventional with out the 50% limit. Would an underwriter underwrite it as a purchase yet close it as a refinance?

@Chris Miller   @Albert Bui   and for the reasons Albert delineated. Sub to is VERY dangerous for sellers... if this loan somehow got called.. and you did not have the equity and or the cash to make up the difference this could really hurt a seller.

rare I know but sellers really need to understand the dangers of sub too and not just get sweet talked into them.

Originally posted by @Jay Hinrichs :

@Chris Miller   @Albert Bui  and for the reasons Albert delineated. Sub to is VERY dangerous for sellers... if this loan somehow got called.. and you did not have the equity and or the cash to make up the difference this could really hurt a seller.

rare I know but sellers really need to understand the dangers of sub too and not just get sweet talked into them.

Yes Every lender is different but my lender's stance on DOS is that we don't call the loan if its performing and paid on time. However, if the seller was late and not paying on time and an investor took the property Sub2 that might be the last straw to have the DOS exercised, always a possible risk whether performing or not from other lenders.

@Albert Bui   I have done quite a few sub too's and I have had a few called. even though they were current... we of course just cut checks to pay them off.

Where sub too becomes a disaster is when the person buying it then sells on contract to a sub prime buyer who then goes on to default.. and the person who did the sub too sandwhich does not have the means to make payments during the foreclosure process and or has the money to prosecute the foreclosure.. I have rescued a bunch of those investors in my day.

I get the sub too attraction I just think those sellers with stellar credit that want to keep their stellar credit take a very big risk giving title away to an asset that they are on the hook credit wise for ... and especially in default judgement states.. Now in purchase money states like the were we live risk of a default does not exist.. but in a State like Texas a seller could get twisted up pretty bad.

Originally posted by @Chris Miller :

Thank you for your reply Albert. With trying to refinance with conventional seems to be difficult to do with 6months title seasoning if the LTV can only be 50% because of the continuity of obligation you mentioned. If that is the case then why are lenders still asking me for a payment history even though " I am not obligated to pay" . However it seems to be different if you have title for 1 year and go FHA you then can refinance with out worrying about continuity of obligation. I still would like to hear from anybody who has ever refinance a SUBJECT TO deal. It seems it should work with conventional with out the 50% limit. Would an underwriter underwrite it as a purchase yet close it as a refinance?

 HI Chris,

Remember you have to have 12 months of payment history to refinance with out COB restrictions to 50% LTV. So you'll have to show that you've made the payments on time for 12 full months (cancelled checks or bank statements to evidence debits on your bank statement to show payment).

The 12 months of payment documentation will be required from the underwriter as a condition almost guaranteed 99.999%.

Keep in mind what I am talking about here is if you pay an underlying mortgage that you're not obligated on and after the 12 month of payment you are "no longer," subject to the 50% LTV restriction with conventional financing. After the 12 months payments above you qualify for the exception so you're back to regular/normal LTV's which depends on your occupancy - second home/primary/investment - it all varies.

As For FHA, first off you have to be primary so this strategy implies you're living there for 12 months and paying the mortgage, that is a completely different scenario. Usually investors SUB for investment purposes so you're SUB2'ing for primary residence?

Originally posted by @Jay Hinrichs :

@Albert Bui  I have done quite a few sub too's and I have had a few called. even though they were current... we of course just cut checks to pay them off.

Where sub too becomes a disaster is when the person buying it then sells on contract to a sub prime buyer who then goes on to default.. and the person who did the sub too sandwhich does not have the means to make payments during the foreclosure process and or has the money to prosecute the foreclosure.. I have rescued a bunch of those investors in my day.

I get the sub too attraction I just think those sellers with stellar credit that want to keep their stellar credit take a very big risk giving title away to an asset that they are on the hook credit wise for ... and especially in default judgement states.. Now in purchase money states like the were we live risk of a default does not exist.. but in a State like Texas a seller could get twisted up pretty bad.

Thank for that insight, it sounds like you were well prepared to be able to just cut a check to take out the underlying mortgage when called. I dont think most investors are that prepared. Speaking for myself I would never consider a Sub2 unless I knew I had alternative exit strategies to take out that underlying mortgage either by private money, conventional, or other routes.

What is the significance of the " default judgement states," versus what we have here in WA, OR, CA ? 

Thanks for the input Albert!! Great info. I use sub 2s for investment purposes. There is 1 that I wanted as my primary and fixed it up accordingly. I was looking to cashout refi that one as well. I wanted to keep refinance as an option exit strategy for my investment sub 2 just in case I needed as I ran into a seller who wanted one a house back after I repaired it. So I am looking into another exit strategy if I need to I can refinance these. There is one that I wanted to keep as my primary and wanted to pull cash out to finish fixing up according to my like as there is good equity in there. Thanks for all the good posts! And Jay you are 100% right sub 2s are very dangerous and having multiply exit strategies available is a plus and need.

@Albert Bui   Great question Albert and one that many learn the hard way.

As you probably aware there are about 12 states that do not allow deficiency judgments on purchase money deeds of trust or mortgages.. these include  CA OR WA NV  etc.

What this means is the trustor has zero obligation to the lender past the property in the case of a foreclosure the lender cannot receive any kind of monetary judgment against the owner.. and for the benefit of anyone reading this.. ( I am sure you know what a purchase money loan is.)  a loan that is used to buy your primary residence is a purchase money loan.. in this instance again as stated no judgment can be gotten against the original trustor. The sole remedy of the lender is the property.

Now take the rest of the states and Texas in particular Mississippi for sure.. and you can foreclose get the asset then sue in court in a different action for a deficiency judgment and get a judgment against the home owner.. this is used when there Is in sufficient equity to protect the lender.. And we see this in Seconds quite a bit.   I have personally done this to borrowers of mine.. I got the asset and I got a money judgment.. Most then just went BK. But it allowed addition tax bene's for me as the lender since it was our money.

IN practice during the GFC banks did not do this.. just like they had a gov. mandated moratorium on 1099C debt relief filings... now though that is done and that is a rude awakening to many folks who think they can just walk.

Question to this @Albert Bui

Under COB exclusion to bypass the 50% LTV restriction:
- you have paid the mortgage for atleast 12 months

What if you do a subject to and backpay 23 months of a loan that is currently in a loss mitigation status. Would doing that allow you to bypass the 50% refinance restriction? 

Originally posted by @Vladut Bujoreanu :

Question to this @Albert Bui

Under COB exclusion to bypass the 50% LTV restriction:
- you have paid the mortgage for atleast 12 months

What if you do a subject to and backpay 23 months of a loan that is currently in a loss mitigation status. Would doing that allow you to bypass the 50% refinance restriction? 

The 50% LTV restriction was an older rule back 5 years in 2016, now in 2021 if you were to do a SUB2 and wanted to refinance then you'd be allowed to do a rate term refinance 1 day after you purchase your property via SUB2 or cash out after 6 months on title up to the LTV caps that your occupancy allows (investment, 2nd home, or primary).

The issues comes when you try to complete the refinance and the underwriter typically wants 12 months of mortgage ratings (payment history) on all mortgages on your name or on the property you're trying to refinance. This will be tough because you acquired the property title subject to the prior sellers note. The prior seller would have to cooperate, sign borrower authorization forms to allow you to show that the underlying note is not in default and or has paid on time for 12 + months. 

The issue then becomes, what if the underlying note has multiple lates within the last 30-60 days ? 

Originally posted by @Vladut Bujoreanu :

Very good points to bring up @Albert Bui. Thank you for the fast reply.

I am leaning towards it might be a bit risky to assume a refinance as an exit strategy if you are in a deal with a lot of equity tied up.

 Yes thats true that take out or refinancing out financing can be risky thats why you plan it ahead of time or in advance of actual need. Make sure you have plan A, B, C, D, and even then.... perhaps plan E too.