Refinancing a seller financed property

9 Replies

What's up BP fam. I've found a potential seller interested in seller financing (contract for deed) through a title company. It's a fully rehabbed EOG townhouse asking $65k. What I'n thinking to offer is $4k down and $700/mo until paid in full. Market is around $850-$950 per mo. Assume we agree to terms. Fast forward, when/how could I go about refinancing to a bank mortgage? Would I have to again pay 25-30% down? Would the rental income help me get approved for that loan? Would a balloon payment go to the seller directly from the bank? How soon after I settle on contract for deed with seller can I then refinance that property? Any insight on this would be greatly appreciated.

Thanks in advance!

@Ken Seveur   You can see it has different guidelines for both products. I am not sure which product guidelines you are asking.   I hope this help.

Payoff of Installment Land Contract Requirements

When the proceeds of a mortgage loan are used to pay off the outstanding balance on an installment land contract (also known as contract or bond for deed) that was executed within the 12 months preceding the date of the loan application, Fannie Mae will consider the mortgage loan to be a purchase money mortgage loan.

The LTV ratio for the mortgage loan must be determined by dividing the new loan amount by the lesser of the total acquisition cost (defined as the purchase price indicated in the land contract, plus any costs the purchaser incurs for rehabilitation, renovation, or energy conservation improvements) or the appraised value of the property at the time the new mortgage loan is closed. The expenditures included in the total acquisition cost must be fully documented by the borrower.

When the installment land contract was executed more than 12 months before the date of the loan application, Fannie Mae will consider the mortgage loan to be a limited cash-out refinance. In this case, the LTV ratio for the mortgage loan must be determined by dividing the new loan amount by the appraised value of the property at the time the new mortgage loan is closed.

Cash-out refinance transactions involving installment land contracts are not eligible for delivery

Rent to own

Rent Credit for Option to Purchase

Rent credit for option to purchase is an acceptable source of funds toward the down payment or minimum borrower contribution. Borrowers are not required to make a minimum borrower contribution from their own funds in order for the rental payments to be credited toward the down payment.

Credit for the down payment is determined by calculating the difference between the market rent and the actual rent paid for the last 12 months. The market rent is determined by the appraiser in the appraisal for the subject property.

Documentation Requirements

The lender must obtain the following documentation:

  • A copy of the rental/purchase agreement evidencing a minimum original term of at least 12 months, clearly stating the monthly rental amount and specifying the terms of the lease.
  • Copies of the borrower’s canceled checks or money order receipts for the last 12 months evidencing the rental payments.
  • Market rent as determined by the subject property appraisal.

@HarjeetBhatti thanks for the information. To clarify, if I'm making installments loans to a seller and there is an outstanding balance: 

within 12 months from that deal I can refinance that loan with a bank and:

Beyond 12 month from making that deal: I can do a cash out refinance based on the loan to value? Is this correct?

Also, whichever refinance option I choose, would I then have to make an additional down payment with a bank? 

150-200/month is a pretty small spread. What happens when you have a big expense? It will wipe out years of "profit" and could happen any time.

Have you calculated insurance, property tax, maintenance and capital expenses, plus management. Those numbers look pretty thin to me. How did you determine the monthly payment? The implied interest rate and/or amortization period appear quite high or short.
Originally posted by @Victor N. :
Have you calculated insurance, property tax, maintenance and capital expenses, plus management. Those numbers look pretty thin to me. How did you determine the monthly payment? The implied interest rate and/or amortization period appear quite high or short.

 I was being very conservative on the monthly rent. It last rented section 8 for $1200/month. But my question for today is how does refinancing yo a bank loan work in this case. 

Originally posted by @Ken Seveur :
Originally posted by @Max Tanenbaum:

150-200/month is a pretty small spread. What happens when you have a big expense? It will wipe out years of "profit" and could happen any time.

 You lost me, sorry

 You are projecting a monthly payment of 700 and monthly income of 850-950.... This doesn't take into account any of the other expenses associated with a rental property, so... seems like too small of a spread to be worth it.

Originally posted by @Max T. :
Originally posted by @Ken Seveur:
Originally posted by @Max Tanenbaum:

150-200/month is a pretty small spread. What happens when you have a big expense? It will wipe out years of "profit" and could happen any time.

 You lost me, sorry

 You are projecting a monthly payment of 700 and monthly income of 850-950.... This doesn't take into account any of the other expenses associated with a rental property, so... seems like too small of a spread to be worth it.

I was told it last rented for $1200 section 8. It is listed for a bit more. I was being overly conservative. But at $1200/month with 4% vacancy, 4% maint., 4% cap x, $50 ins., and $158 taxes, net cashflow is $192 while mortgaged at 5% down and 5% interest.

A few other comments for Ken...

Q: when/how could I go about refinancing to a bank mortgage? Would I have to again pay 25-30% down?

     JG:  Harjeet is far more knowledgable than I around bank lending so I defer to her.   On the downpayment, you should certainly get some credit for your downpayment already paid and principle paydown.

Q:  Would the rental income help me get approved for that loan? 

JG: It should help from an overall debt-to-income analysis perspective although every lender is different.

Q:  Would a balloon payment go to the seller directly from the bank? 

JG: Normally, yes, the lender doing the refi, via a title company, would normally route the $$ directly to the lien holders.

Q: How soon after I settle on contract for deed with seller can I then refinance that property? Any insight on this would be greatly appreciated.

    JG:   Defer to Harjeet...