Burning Bridges With Banks After Refinancing?

20 Replies

I am planning to purchase rental properties by using a HELOC on my primary for the down payment. The goal is to then refinance the new rental property after about 6 months then rinse and repeat. My question is, would the original bank that I used to purchase the rental property, frown upon the fact that I am refinancing after such a short period of time? Would this lead to them no longer wanting to approve a mortgage for me in the future?

Sean,

Most banks sell the loans off and if you're waiting 6 months you'll be fine. Heck even if you waited one month you're not going to hurt anyone’s feelings.

If you were happy with the bank use them again so they get the business. And if you weren't happy with them take your business elsewhere.

At the end of the day refinancing after a 6 month period is normal so your bank won't frown upon this transaction.

I hope this helps and have a great day Sir.

Shaun Weekes, Innovation Lending Solutions | [email protected] | 949‑610‑3126 | https://www.facebook.com/Innovation-Lending-Solutions-Inc-261955880814516/ | CA Agent # 0L51686

I paid off a home equity loan too fast with my credit union once and when I went back a few years later, the loan officer asked me first thing if I was going to pay it off quickly again. 

It depends on what you do with the heloc once you cash out on the rental.  If you curtail the line of credit but keep it open, (eliminate interest expense but able to advance again to fund next purchase) then they will be fine.  Banks love to see lines of credit revolve.  And around here, banks keep home equity loans and lines of credit in house, never heard of a heloc getting sold.  If you paid off the heloc and just planned on getting a new one each time, not only would you annoy the bank, you would also incur extra expense via doc prep fees, closing expense, appraisal, filing fees etc. 

If you go with a home equity loan that is the traditional term loan product, and plan on buying more rentals, then pocket the proceeds when you cash out refi the rental and just put the capital back to work as soon as possible. 

Shaun Weeks thanks for the reply. What you say makes sense especially if it is a commercial bank that would sell off the loan anyway.

@Chris Simmons thanks for your reply as well. I am planning to keep my HELOC and just pay it down as I refinance each rental property. I was most concerned about the bank that would be giving me the actual mortgage for the rental property. My initial thinking was that since they are in business to make money on the interest I pay over time, I thought they might think it wasn't worth it to do business with me if I would
only be keeping the mortgage for a short amount of time.

@sean s. 

I am struggling to understand which of us is more confused.  From what I understand, you are getting a heloc on your primary residence in order to pay cash for a rental.  

Leveraging the equity in your primary residence for the purpose of prchasing another property is not the same as taking out a mortgage against that property you intend to buy. 

After you purxhase the new property, hopefully well below market value, you will wait 6 months for it to season and then "FINANCE" or mortgage for the first time, not refinance, rental property 1 to get cash to buy rental 2.  

Why would the bank be upset at you coming to them for a second loan or third loan?   In this scenario, you are not refinancing anything nor is there any reason to do so.  

Three words: Delayed Financing Exception.
Look it up. You can refi right away after a cash purchase (must close refi within 6 months). You may need to ask around to find a lender who will actually do it, but it's a beautiful thing.

for investors like myself that deal in distressed, under valued properties, this is not an option. By allowing a property to season, we can complete rehab and take advantage of 75% LTV of the appraised value, not purchase price. This allows us to recoup most, if not all of the capital invested in the property and thus end up owning a property with at least 20% equity with almost none of our own capital invested.

For those wanting to waste capital, I mean invest 25% of purchase price in each property, this is an option.  

@Chris Simmons
Pardon me if my posts have been confusing. In my original post I mentioned that I would be taking out a HELOC on my primary to use for a downpayment on the rental property. So, since the line of credit will only be used to make the down payment, I will be looking to finance the rest to complete the purchase of the rental property. Now, 6 months down the line I will be looking to refinance the rental property. So let's say the bank that financed the rental property was Wells Fargo and I refi that mortgage with a credit union. Would Wells Fargo be reluctant to provide a mortgage for a second rental property with me knowing I might refinance with another bank in 6 months? Shaun Weeks made the point that the bank (in this case Wells Fargo) would probably sell off the loan before the 6 months so it really wouldn't matter to them.

The flaw in this approach is that your second lender might have a seasoning requirement before they will use a value other than the original purchase price. So you wouldn't have accrued any equity beyond the original down payment, and they will still use the same LTV, thus you still leave money in the property from the down payment.

@Chris Simmons  and @Steve Babiak  

I guess it depends on the lender. I've completed two cash-out refi under delayed financing exception and lender did loans based on appraisal after repairs (in both cases >20k more than purchase price).  If your lender won't do that, then I would agree DFE is not a great option. 

yeah, I don't see what is getting accomplished with the refi after 6 months.  And yes, I admit missing the part about using the heloc for a down payment.  

I recommend including numbers to illustrate what you are tying to do.   Walk through what you envision your first deal to look like. 

Or, you can just rely on the big bank to sell the mortgage, make sure you don't have a prepayment penalty and stick with your plan.  

But, in still trying to understand your scenario, I will continue with my current thought process. Since you are using a heloc to cover the down payment, I will assume the first mortgage on the rental will be at max LTV for that lender and let's just assume that is 75% of LTV or purchase price since it is not an owner occupied property.

If you are buying something turnkey, where you don't have any chance for sweat equity or overall rehab, unless you buy it for well below market value, I don't see how you can accomplish anything be refinancing it in 6 months.  It won't generate enough revenue to pay down that much debt, and I assume that if you could save up capital that quickly, you would not need a heloc for a down payment.  If you don manage to find something significantly below market value, then you can see if it will appraise for more after it has seasoned and pull out equity.  Just don't see this being very successful but I don't know your market or what type of deals you can put together.  

If you are getting an undervalued property that does need work, if you need a heloc for the down payment, where will the capital for rehab come from?  Savings?  Credit cards?   Same thing, complete rehab, let it season and try to pull equity out with new appraisal. 

I will look into DFE. Thanks for the tip. If nothing else, the refi should allow me to free up my downpayment money so I can reinvest it in another property.

@Doug McLeod  

I would like to see details of your two deals as they seem to run counter to Fannie Mae guidelines. They may order an appraisal for the refi, but that is just to make sure the new loan will not exceed 75% LTV.

You are only able to borrow the original purchase price as stated on the original hud-1 plus the taxes, prepaid points, closing costs etc.  You can't actually pull the equity out that exists above your initial purchase price.   

https://www.fanniemae.com/content/guide/selling/b2...

Chris Simmons
I understand what you are saying and you make valid points. I'm not necessarily stuck on 6 months. I was just using it as an example because I was under the impression that it was a typical seasoning period. So really whatever the seasoning period is I will focus on it, hoping that the new bank will refinance based on the new appraised value after any repairs.

Example REO property:
ARV - $110,000
Original Asking price - $79,000
Purchased for - $70,000
20% down - $14,000
Amount Financed - $56,000

Refinance Amount 75% LTV (after seasoning period) - $82,500

These numbers are just an example The refi should cover enough for me to pay back the down payment amount and any repair costs (if repairs were within $12,500) so I can use the HELOC on another property.

By the way, thank you for the link. If I'm reading it correctly, I would be able to do a cash out refi as long as it is after the 6 month period. One of the acceptable uses listed on the website is:

•taking equity out of the subject property that may be used for any purpose;

@Chris Simmons In my two cases I purchased in the low 70s. Appraisals after repairs were 95 and 96. These were 5th and 6th loans, so I could only get 70% LTV but that still gives me most of my cash back for future purchases. So you cannot pull out equity above purchase, but when paying with cash, it's all equity being pulled out.

Happy New Year all!

The answer to your question, is yes and yes they will frown upon it as it is an investment for the bank as well, and after only six months have not had an opportunity to recoup their investment. In fact many banks will make provision within the contract that you not allowed to refinance for a period of a couple years. Banks are in business to make money, they will not look at you the same if they know that you're planning on refinancing the note after only six months. Having a consistent banking partner I believe it's crucial to any successful real estate investors that you have excellent partners, that includes banks,architects, attorneys, mortgage brokers and contractors etc.

@Robert Nason thank you for answering my original question. If this is true then this exposes a major flaw in my strategy to rinse and repeat by refinancing after the seasoning period. I wouldn't want to start cutting off my options by turning banks off. I thought this was a common strategy. Do you have any ideas to get around this? Has anyone had any success with this strategy and if so, with what banks? Thanks again.

I would be forthright and upfront with your bank about what your intentions are, if they feel they can make money they may go along with it there's nothing unusual about what you doing it's just you have to be someone of a mercenary with banks and be willing to go with I was going to give you the best deal. Six months is not a very long time in the real estate world, you may want to approach you bank with something closer to 12 to 18 months.

Robert Nason I am going to seriously consider what you are saying. I think disclosing my intentions up front will be best. Thanks.

In scenarios like this, I do not use conventional financing on the original purchase.  This is a great example of how to use hard money.

On the original purchase, use your HELOC and a hard money loan. Create or realize equity in the property. Wait six months (or whatever seasoning your bank requires--currently we are seeing 3 months for rate and term refi's and 6 months for cash out). Refi into conventional long-term financing based on appraisal. With this method, the long-term refi is the only loan the bank is writing.

You may find that conventional financing on the original purchase is not a whole lot cheaper than hard money for such a short period.

Also, talk with the HML and conventional lender to set these up properly at the front end so the refi goes smoothly.

Wm

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