Refinancing at balloon payment

2 Replies

I've read a bunch of posts on seller financing and balloon payments and I can't seem to find a direct answer.

Im looking at purchasing a 3-4 unit multifamily (non-owner) property with seller financing. Lets say 10% down on a $180,000 = 18,000 down. Assume a %5, 30 yr amort. with 5 year balloon payment. When that time comes my balance $156,763 is due. Provided the value of the home doesn't change, the bank is going to want an additional payment of $21,763 to meet a 75/25 LTV ratio. I could prob pay that from my full time jobs income but is this trade off for getting in with only 10% down? Is their another way? Or do most people just counter this by forcing appreciation?

@George S Depends on your lenders LTV requirements for cash-outs. Most are 70% LTV which means you'll have to bring more to the table. I try to buy properties that need fixing so I can create that extra value spread to cover the cash-out refi, just like you mentioned. Just getting a real good under-market price on the deal is an option as well.

If you're going to pursue this strategy, make sure you're familiar with all the underwriting guidelines that lenders use. The more you make yourself attractive as a borrower, the easier it will be/better chance you'll have to get financing when that balloon comes due.

Have multiple exit strategies. What will you do if you can't refinance? will you be able to sell? If you have to sell quickly to get out of the deal, it might be hard to do so with only 10% equity.

I'm just throwing out things to be mindful of, getting in with 10% down is great IF the deal is great. Just plan ahead!

George,

When I buy on land contract I do a 10 year amortization so that the principle is paid down much more quickly. That way when I have to pay the balloon I don't have to pay any cash into the deal. This will only work of course if you can afford to break even because you probably aren't going to cash flow very well at a 10 year amortization.

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