How do you approach lenders about cash out refi?

21 Replies

Hey everyone.

First time posting. I've been pouring through the BP podcasts and have heard almost all of them. I had a question that had probably already been asked, but I haven't had time to sit down in front of the computer to research heavily, yet.

So, to my question: is there better way to approach smaller banks and lenders during a cash out refinance. Right now my wife and have been analyzing deals using a BRRRR strategy. From what I understand, I should be looking for the right underwriter. How will that person identify himself as the right lender? Further, I've heard it takes upwards of a year to season a rental rehab: are there any tips anyone has to shorten this time?

Thanks for the help!

Robert

rental seasoning takes about 6 months for most banks, but you might want to pursue using 'delayed financing' which has some benefits as well and can be used immediately after a tenant is in place.

How many banks have you spoken to? Cashout refi isn't some secret off-menu program that you need to bring up any specific way.

What I usually do is hit google for lenders, accumulate about 15 names/numbers/email addresses and then contact all of them and tell them what I'm trying to put together, the best one to deal with usually presents themselves fairly quickly in my experience.

My wife has contacted some of the larger banks. I told her it would probably be unsuccessful. I just wanted to find the right lender to put our efforts into. Wanting to BRRRR a bunch of times and I don't want to get tied up for months, because the lender decided no more, while we have private loans or personal capital in it.

Can you elaborate on delayed financing? What is it and how can I find out if it's a better vehicle?

Okay, I just looked at it. It looks you use delayed financing to pull out everything invested. Correct me if I'm wrong, but it looks like your loan is based on capital/closing costs, subject to appraisal; rather, refi would be based on LTV. Is that right?

Yup. Pretty much any bank big or small can provide you a cash-out refi, or delayed financing. Rates and details will vary slightly, but they will all be about the same.

Ah, any big bank will do a cash refi? Just spoke with PNC and they said only on our residence, not an investment property. I guess our mileage varies. That's why I was curious if we were saying/asking the wrong things.

@Alexander Felice @Mike McCarthy

Thanks for weighing in. I've actually been approached by some lenders thru the BP forum.

Originally posted by @Robert Keller :

Ah, any big bank will do a cash refi? Just spoke with PNC and they said only on our residence, not an investment property. I guess our mileage varies. That's why I was curious if we were saying/asking the wrong things.

 Article: How Lender Overlays Prevent Mortgages

Most lenders are not REI-friendly. What you describe is outright REI-hostile. Keep plugging away. The other poster said to make a list of 15 and work with who is obviously the best to work with, that's not crazy at all IMO.

Originally posted by @Robert Keller :

Ah, any big bank will do a cash refi? Just spoke with PNC and they said only on our residence, not an investment property. I guess our mileage varies. That's why I was curious if we were saying/asking the wrong things.

You need to make sure that within the first sentence, they know that you're NOT asking about owner-occupier Loans [unless you DO want a HELOC]. You'll know very quickly if they have an INVESTOR-friendly Loan Officer you can talk with.

ie. One who knows ALL about the "Delayed Financing Exception", and lends accordingly:- https://www.fanniemae.com/content/guide/selling/b2...

And then, when you're sitting cosily in their office, you'll explain that you'll ONLY be looking to borrow 70% of THEIR Appraisal, on properties that you DON'T have a mortgage against (even though you are allowed to have already paid for them by HELOC or personal Loans). [Meantime, only buy absolute bargains ie. That 70% pays out 100% of your outlay!]

Talk to a smaller local bank. They are way easier to work with in my opinion and as you grow, they will be more willing to be creative with your future deals if you keep a good track record. 

Attend your local REI meeting, or find their page on FB and figure out what banks other investors in your area are using.

Someone local to you is likely doing the same things you are trying to do... and someone has found a way to do it. If you can't find someone local I have a lender who's very REI friendly and get's what you are trying to do... PM me if you want a referral.

There are also bigger banks that will do cash outs online if you search hard enough. BEWARE though make sure it's actually a bank... if you go hard money route you need more due diligence.

@Matt K. what do you mean by beware? A bank as opposed to a private lender? Is a private or hard money lender not the best solution, if we lack the initial capital?

A bank or credit union pretty straight fwd and the chances of someone making a fake one are rather slim. That risk increases but is still slim if you go online only. 

When you move on to a broker the risk increases some but you can still figure it out.

Once you move into the private world AND broadcast you need money you have people seeking you out simply to rip you off. They'll charge you bogus feees upfront and nothing will ever come of it. They'll be harder to figure but the terms will give it aaway if not something else before. Lot of the hard/private money is about relationships and you have to prove yourself in a sense to gain their trust and vice versa. When a random off the internet emails you saying he'll get you 3% 100% financing for just 3500 upfront and no credit check needed, they're lying. You'd have been better off lighting that money on fire.

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@Robert Keller When you are getting started with the BRRRR strategy it is very important to have the refi part of the equation relatively lined up before purchasing. You are very smart to be looking into that aspect of the strategy before purchasing, believe it or not a lot of people overlook that.

When we started with this strategy here in CT we started by calling upwards of 40-50 banks throughout the state to see if we could find a lender that was open minded enough to cash out refinance an investment property within 6 months. What you will find out by calling around is the national banks and regional banks are a waste of time to even call if you are looking to cash out within 6 months. 

What you want to ask when you call the bank is to speak with the commercial lending officer or anyone that deals with the banks portfolio loans. Then from there outline what you are looking for and you will know right away if they are open to doing these types of loans. Typically with the banks I have dealt with, the commercial/portfolio loan department at a bank is much more likely to "speak the language" of an investor more than a typical residential loan officer. Not always the case, but most of the time. 

Once you get a bank that is willing to entertain these types of loans set up an in person meeting to get specifics on the programs they offer, but be prepared to pay more in closing costs, rates, fees, and be prepared to put at least 25% down. We actually had to put 30% down for our first one with a local bank here in Connecticut. The trade off of them taking the "risk" to refinance you within 6 months is the rates, terms, etc. will not be as favorable as a traditional lender. This is the aspect where I find most newer investors get scared off. They don't realize the value in being able to recycle your money quicker and they get caught up in "my rate is higher, my downpayment is more, and my term is shorter." Well of course it is, they are offering a product you can't find many places so you are going to have to pay a little more for it.

If the numbers work, you are able to move your money quicker to the next project, and you are getting most of your cash out, who cares? That was always my thinking anyway. Getting caught up in how much other people are making in this business will drive you nuts.

Always have in the back of your mind that in the end when all is set and done you will have a property that is completely rehabbed, rented out, and you will have minimal cash into it out of pocket once the refi is done. This will help you get through the frustrating times that you will definitely experience executing this strategy. You are choosing the road less traveled and there are challenges as a result.

Wow, what a timely thread.     I was just down at my credit union today looking to pull my money out of my last deal.     I got suckered in by a phone call when I was told that my property would be seasoned tomorrow (6 months).      When I got there, I was quickly shifted over to the commercial loan officer.     I explained what I wanted.   He asked how much I had in the deal.       He was only willing to loan up to 80% of what I had in the deal out of pocket.    

(Bought distressed house for $30k. Into it for about $55k. Property worth about $75k (ARV). 80% is only $44,000. I thought I could get 80% of the appraisal.

$40k isn't enough for me to buy the property I've got my eyes on.     I need $60k.     He switches the process over to a 30 year commercial mortgage (5 year ballon).

Looks like I need to save up for a few months and then just do the 80% commercial line of credit at 5.25%.      

Originally posted by @Steve TeRonde :

Wow, what a timely thread.     I was just down at my credit union today looking to pull my money out of my last deal.     I got suckered in by a phone call when I was told that my property would be seasoned tomorrow (6 months).      When I got there, I was quickly shifted over to the commercial loan officer.     I explained what I wanted.   He asked how much I had in the deal.       He was only willing to loan up to 80% of what I had in the deal out of pocket.    

(Bought distressed house for $30k. Into it for about $55k. Property worth about $75k (ARV). 80% is only $44,000. I thought I could get 80% of the appraisal.

$40k isn't enough for me to buy the property I've got my eyes on.     I need $60k.     He switches the process over to a 30 year commercial mortgage (5 year ballon).

Looks like I need to save up for a few months and then just do the 80% commercial line of credit at 5.25%.      

Looks like you got the bait-and-switcheroo treatment. Seasoned buys are SUPPOSED to allow borrowing of: percentage of APPRAISAL. The warning signs were evident the moment they asked you what you had into it - which should have been COMPLETELY irrelevant, and I reckon you would have been best served by calling them out on that point, and so not told them your purchase AND rehab costs. Rehab costs = not their right to know!

Nonetheless, the USUAL seasoned percentage (75% or less, not 80%) wouldn't have got you the $60k you wanted anyway. Properties that only Lender-appraise at $75k won't get you any more than their minimum mortgage of $50k (plus costs), so you'd better not have any more than $50k into it if you want ALL your outlay back. And if you get your sums wrong, they might appraise it at LESS than $75k. And if they haven't taken a shine to you, they may relish saying: sorry, it doesn't appraise at our MINIMUM loan level!

And even if they approve your loan, they're likely to be not very happy that you're on their minimum fringes.

ie. Their unspoken threat might be: don't make a habit of buying such cheapos!

Or, WOULD they let you borrow just $44k (so long as you could come up with the difference to clear any earlier loans)?

If so, perhaps they're more desperate than I've been led to believe such Lenders are. 

[But still, it looks like you WERE "suckered" with their "property would be seasoned tomorrow" rhetoric!]...

Thanks for the experienced feedback, Brent.   It definitely seemed hinky to me.    I'll check out some other lenders.    I've got some extra cash but I don't want to be cash poor with a new property with possible unforeseen issues.   

@Robert Keller

Here’s something I found from another BP members post. I will paste it here. Hope it helps. All the best to you. Here goes:

1. The Conventional Rules For a Cash Out Loan

Fannie Mae and Freddie Mac are the Government Agencies that sponsor conventional lending. Most banks will have these loans as an option. There are other loan types as well but for brevity we will limit this post to the “Conventional” lending (Fannie/Freddie).

  • ConventionalLoanslimityourcashoutonaninvestmentpropertyto75%ofthe“AfterRepair
  • Value” on a Single-Family home (70% on a 2-4 unit home). This is also the same percentage that you need for a non-cash out refinance (more on why that is important later).

    • If you purchased the investment property with a loan,then conventional loans will require you to wait 6 month to take cash out.

  • This rule does not apply if you purchased the home with CASH (more on that in section 2). Let’s explore some examples here:
  • If you purchased a property with a 15% down conventional loan (85% loan to value) and you wanted to get cash out, you wouldn’t be able to do so since the cash out limit is 75% of the “Loan to Value”. The MAXIMUM cash out you can receive is 75% of the value of the property.

    If you purchased a property with a loan, but did the rehab on with your own cash, then you would need to wait 6 months to get that cash back. Keep in mind you could only receive 75% back of the After Repair Value.

    So if you bought a home with a loan of $50k, it required $30k in renovations, and it appraised for $100k after the repair work was complete then....

    You would refinance the $50k loan, receive back $25k in cash...since

    $75k would be 75% of the After Repair Value.

    2. Buying a home with Cash

    Buying a home with cash has become increasingly popular for many investors but often an investor will be caught with the restrictions to cash out loans if they need to get their money back. There is a plan to avoid this entire section (In section 3) but it is important for us to know about these restrictions. If an investor is buying with cash and flipping they get their money back when they sell the property. But if they are seeking to hold a property for any length of time and want their cash investment back there are some important rules to understand with conventional loan:

    If you buy a property with cash (or with a HELOC) you can receive a cash out loan on Day 1.

    There is not a 6 month waiting period with receiving a cash out loan if you purchased a home with cash or with a HELOC

    BUT you will be limited to the amount of....

    Your purchase price + closing costs (costs when you purchased the home)

    OR

    75% of the “After Repair Value”...

    WHICHEVER IS THE LOWER AMOUNT (super important)

    These rules are important to understand so here are two examples:

    Example 1: If you purchased a home with $50k of cash, and put $30k of renovations into the loan, and the home was worth $100k. 75% is $75k and $50k is your purchase

    price. So you could only receive $50k in your first 6 months of ownership since the

    LOWER amount is your purchase price. After 6 months you could receive the full 75% of the ARV.

    Example 2: If you purchased a home with $80k of cash, put $5k into the home, and the home was worth $100k. 75% would be $75k and your purchase price is $80k...so the lower amount is $75k.

    When buying a home with cash you can absolutely get cash back right away but you will be limited to the lower of those two amounts.

    3. HOW TO PROPERLY STRUCTURE BUYING A HOME WITH CASH

    With these rules, you can see how it can be confusing to get conventional lending when buying a home with cash but there is absolutely a proper method to structuring your deals when buying cash. Here’s the secret:

    Create an LLC and have the LLC lend you a mortgage on the property you are

    receiving.

    The reason why this works is because instead of you needing cash or receiving a cash out loan, we are now refinancing a loan – your loan. There no reason to wait any time or have any “whichever is lower” rule come into play. We are just refinancing a loan.

    Here’s how it works:

    You create an LLC

    You buy a home

    Your LLC gives you a loan for the home

    You file the deed for that loan at the county courthouse

    You use the money from the LLC to buy and fix up the property

    Once the property is completed, your conventional lender comes to refinance the loan Your conventional lender runs title and sees there is a loan.

    Your conventional lender refinances you into a new loan, and cuts a check to your LLC in the amount of 75% of the value.

    Please don't confuse this 75% with a "cash out" amount. The non-cash out LTV on a refinance is also 75%. We are refinancing a mortgage. Your LLC's mortgage. Essentially your LLC has become the bank/hard money lender/etc. However you want to think about it. You get to set the interest rate (it can be 0%) and you get your investment amount back sooner.

    Some things to think of:

    To file a deed at the county courthouse is $100-$150 in cost (depending on which county)

    And you want that note to be pretty close to 70% of the ARV for the property if you don't want to bring any money to closing. 70% will allow you to roll in your closing costs. If you want it to be at 75% just keep in mind you would need to bring your closing costs out of your pocket to complete the refinance.

    @Jorge Ruiz

    Wow. This information is critical. Thank you for reposting. I haven’t read or heard some of those things before and will DEFINITELY keep it in mind in the future. I have only looked at LLCs as asset protection at this point and didn’t fully understand I could use it that way. I can’t thank you enough for sharing.

    I will echo what others have said in the thread.  Finding a local bank to where you are investing is vital.  I'm not sure why folks use the bigger national banks.  Overall, they are pretty unfriendly to most customers (including investors).  The small local banks are where it is at, and as someone else mentioned, they will work with you as you expand.  If you have a good track record with them and are a valued customer, they will be flexible with you and work with you.  The google idea is a great idea, and I've done something similar when my first bank decided to pump the breaks.  If you don't want to cold call banks (highly recommended), I'm assuming you bought the property with a real estate agent?  Any good real estate agent worth their salt will have a list of lenders that they should be able to introduce you to.  Unfortunately, there isn't a shortcut and you'll have to do a lot of hustling, talking to banks, etc.  Best of luck.

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