LTV on rate and term refinance

18 Replies

I have a quick question on rate and term refinance:

If I buy a 100k property with a private mortgage of 90k, and the property appraises at 100k, will the bank be ok with a rate and term refinance loan for 90k, or will they cap it at 70k (at 70% LTV)?

Thanks for helping out a newbie.



One question I've had on rate and term: I've seen traffic on the forums that if you are not taking cash off the table at closing, you don't need seasoning and can rate and term the next day.  But doing my own perusing of Fannie Mae documentation, I can't see where it specifies that.  So, with @Naveen Kumar 's example, if you purchase an off-market property in an arm's length deal at 100K and have a 90K mortgage, but with some sweat equity and a month's work, an appraisal could peg it at 120K, will you be able to have that appraisal ordered and rate and term out of the purchase loan at 75% LTV? Or will they insist on purchase price under six months even if you're not taken cash at the closing table? I know the traditional answer is that any bank can have overlays that would preclude it, but it would be good to know where's the reference / citation saying it's not Fannie Mae's policy.

@Neil Sinha - from what I have understood, and experts please correct me if I am wrong, with a rate and term refi, the new lender will order the appraisal. If that comes as 120k, you are eligible for 80% LTV, or the outstanding loan amount, whichever is lower - so 90k in this case.

I would love to hear from someone who has actually done it, or find a conventional lender that would do a rate and term refi. 

@Naveen Kumar @Neil Sinha

This is the strategy I used on my last 3 properties. Although I have not seen any 80% LTV on investment properties only 75%. I make sure that my purchase + rehab is 75% or less of ARV and that is what I have as a private mortgage from my LLC. As long as the appraisal comes back solid, I can get all or most of "my" cash out then do it again. Here is an example of my latest one......

Purchase Price: 45k

Rehab: 22K

Mortgage from LLC: $67k

($500/mth interest only for 11 month with 67k due on 12th month, and yes I actually make the payments to my LLC and provide the canceled checks to the bank. Most times that is only one check because I generally don't take on rehabs that I cannot finish in 30-45 days. I also factor these payments into the rehab cost along with other estimated closing costs to ensure I get it all returned)

Appraisal: $90k

New Mortgage: $67k with traditional lender (check for $67k to my LLC at second closing to pay off initial mortgage)

Thanks for the real life scenario @Rashad Luckett - do you really have to go this route if you are waiting 11 months to refi? I thought this strategy is more for the cash buyers who cannot refinance before 6 months due to the seasoning requirements?

Are there other benefits you see with your strategy?

@Naveen Kumar

I typically refi in 30-60 days max. Writing the note from my LLC that way accomplishes a few things....

1. Gives me as much time as I need for unforeseen items

2. Most hard money loans are written this way so banks are used to seeing it so it should not draw any extra scrutiny. (purely my opinion only)

@Rashad Luckett , that's an interesting approach to lend from your own entity to yourself to make it a rate and term instead of delayed financing. Can you talk about how underwriting on the traditional lender handles the mortgage? Have they looked at what original purchase price was or that the loan they're taking out was ~150% LTV at closing? Or they don't care, they just see you have an existing principal balance for 67K and want a loan from them for 67K and thus the original transaction is irrelevant? That's the piece I'm trying to understand, particularly if anyone on the forums has the insight on why Fannie Mae makes traditional loans hold firm on purchase price as value for six months if there's cash out, but will order a new appraisal value if you're only paying off one loan with another.

@Neil Sinha

My experience has been that they do not care as long as....

1. The note was used to purchase the property

2. It is properly recorded at the courthouse

3. You have made the necessary payments

4. The appraisal supports the LTV

It may seem odd but when you think about it, they do this refinancing hard money rehab loans all the time. 

Step number 2 is crucial for this method to work.

There's another post here on BP outlining this strategy in great detail.

@Rashad Luckett - thats a great checklist. Do you have any templates you can share that you use for the note that was recorded at the courthouse?

@Brian Garrett - I looked for the post and couldn't find it in the ocean of posts :) - is it possible you can share the link to the post you talk about?

Appreciate all the help 

@Brian Garrett any chance you have the link to the thread? I've been doing everything I can to study up on the refinance portion of the BRRRR strategy because it seems like there's limited options to move with velocity:

1. HML (with down payment in most cases) for purchase plus rehab, which then can be traditionally refinanced out of the loan portion, but if you brought cash to closing, that can't be returned unless you season six months

2.  Cash purchase and cash rehab, which you can get traditionally refinanced out under six months with delayed financing, but your rehab expenses can't be returned unless you season.

3. Obtain some form of creative loan where all your cash in the deal is recorded off the settlement statement and is negotiated by you and the purchase lender. You then rate and term out of that loan, and the original lender returns your funds. That seems to need either creative HML (not all of them have a product that will put your down payment into a vehicle it can come back to you), or using an entity such as mentioned in this thread (which is a new trick I hadn't seen).

Still, understanding what the hard-written Fannie Mae rules are that allow rate and term faster than cash out would be good for my learning so I know why #3 works.

*bump*  Does anyone in the know (mortgage brokers or originators) on the forums have the reference that shows why an appraisal can be used for rate and term refinance prior to six months, but cash out triggers the requirement that purchase price only be used for property value until seasoned?  I haven't been able to understand why simply paying one loan principal with another allows the underwriter to get a new appraisal value faster.  I would assume the same logic of "purchase price indicates fair market value if the parties are arms length" would hold for a rate and term.

Bringing this thread back, with a link that explains, in great detail, some aspects of the strategies described above...

there's great anecdotal evidence and situational questions and answers in the responses as well. A real gold mine of info! 

I've read the linked thread multiple times and have to thank @Andrew Postell for the invaluable knowledge!