Can a new full time investor do a cash out refinance on their first investment property? What are the steps to do so?
@Jacqueline Segui A quick search of the forums shows a lot of information on this topic. Just search for your subject line. That said, and disclaimer: I haven't done a deal yet, my understanding is that there's no reason you shouldn't be able to. It would look something like this:
- Find a good deal, one that allows you to buy a property for a price that, after $X amount of rehab costs, will be worth more than the original purchase price plus $X. Using common terminology, one that has an ARV (after repair value) that is higher than original purchase price + rehab.
- Finance the deal. You have a few options, but your most likely path is unconventional financing like hard money, portfolio lender, or a private lender. Unless you have tons of cash, that is. These unconventional loans are typically shorter term than a conventional mortgage, with worse terms and rates.
- Do your rehab. Once complete, you should have some equity into the property.
- Wait a while, most likely. Most lenders require you to wait at least 6 months, sometimes a year, before they'll allow you to do a cash-out refinance. Check with your lender for their specific terms. You could rent it in the short-term to generate some cash-flow.
- After the minimum required time, go to your lender and tell them you're looking refinance. They'll send out an appraiser to determine its market value. The lender will generally give you 80% of the appraised value (sometimes 75%) in a cash-out refinance. You should be looking to refinance into a conventional 30-year fixed rate mortgage.
- Get the money from the bank
- Pay off your original lender
- Pocket the surplus, if there is any
- Start paying your new lender for the conventional mortgage
With simple numbers:
- House in need of rehab for $97,500
- Needs $50,000 rehab
- $2500 in closing costs
- Get a loan from a hard money lender for $150,000
- Rehab the house
- Ask for refinance. House appraises for $200,000
- Bank gives you 80% of $200,000 = $160,000
- You pay off your hard money lender the $150,000 you owe
- You pocket the leftover $10,000
- You're now on the hook for a 30-year mortgage of $160,000 with your new lender
Hope that helps. Again, I've never done it, but it's what I've learned.
@Matt Powell Thank you so much for taking the time out to write such a detailed response. I greatly appreciate it. I have been following the links re: cash out refinance on BP, however what I was unsure about was whether you had to have W2 income to get a cash out refinance. I have been researching Fannie Mae's Cash Out Refinance program on their website and as I understand it as long as the property has no existing mortgage on it due to purchase as an all cash transaction you may do the cash out refinance with no W2 income needed. The six month waiting period on these properties has now been waived. You must be able to document where the cash used to purchase the property came from; The new loan amount may not exceed the property's original purchase price; A title search must show there are no liens on the home; Homes purchased must be arms length transactions and proof that an actual sale occurred is demonstrated by the fully executed HUD-1 statement; Loans are for 70% LTV on 1-4 unit properties. Delayed mortgage can also be used on second homes, vacation properties and rental units; You can also finance more that 4 properties. If any one has any other insights, information or corrections to this please share.
First I would check to see if it is even worth it at this point to do a cash out. I cant speak for most lenders but the lender I chose only would do 70% of the appraised value. Then out of that you have to minus the closing costs.
A cash out is very much like purchasing the home all over again with a mortgage, you will need documents such as your w-2s, leases on the property, last two or three years of taxes, id, and bank statements.
Up front fees may be an appraisal and a survey.
I would start by calling lenders, they can run your credit and give you a basic idea of how much you qualify for.
You would still need to prove that you would have an income to pay for the mortgage. If it is a business income than you need at least 2 tax returns. If it is income on the property only than you would have to be in line with your DTI's to qualify.
@Mary Lou L and Jerry Padilla. Thank you both for your input. It was my understanding that the cash out refinance did not require W2 and that the rental income from the property would be used. The reason for the cash out refinance is to let rental income pay mortgage and reuse the cashed out funds to purchase another property. Please correct me if I'm wrong