How to get a bank to do a refinance for BRRRR?

Question

Hi,

My local bank said they will not refinance a BRRRR without me leaving 20% hard money in the property even if my improvements increase the assessed value by more than 20%. Seems to paralyze the BRRRR method.

Can anyone suggest a bank that will allow me to cash out on the BRRRR? Looking in North Carolina (if that matters).

Thanks!Paul

Adam Schneider · Answer

@Paul Sterman Regarding refinancing on BRRRR deals, the devil is in the detail. First, not all banks / credit unions are created equal. They have different overlays. What's an overlay? Here's an example. In NC, if you want to buy cigarettes, you need to be 18. But if you go to Walgreens, you have to be....21. Why? Because Walgreens has an overlay policy. Banks are the same way with their underwriting. There are federal guidelines and then the bank's guidelines. The second comment has to do with seasoning. If you ask for a refi after having owned the property for less than the bank's seasoning period (ex 6 or 12 months), the bank will have one set of terms. If you do the refi after the seasoning period, you'll have a different set of terms. For example, the bank may say that they'll only refi 80% of purchase price if before the seasoning period has ended -- but they might be open to lending say 80% of the APPRAISED value, or 80% of the appraised value but not more than you have spent--after the seasoning period has ended.

Kevin Sobilo · Answer

@Paul Sterman, I think you are running into the banks "seasoning requirement", but that it wasn't explained well to you by the mortgage person.

For example, if you used $100k of hard money ($50k to buy and $50k to rehab) a property, and completed your rehab in 3 months, the lender will likely only value the property at $100k for lending purposes and only lend you maybe 80k. That isn't enough to pay off your hard money loan! That is why they are saying they can't lend to you because you won't have enough to pay off the existing loan to complete a RE-finance.

The reason they would only value the property at $100k is that for the first 6-12 months after purchase, most lenders will only value the property at purchase price plus rehab costs. This keeps them from lending based on values that are too speculative I guess. After this 6-12 month period, a lender will based the value on a new appraisal of the property.

So, I suggest contacting local community banks and finding out what they offer, but specifically inquire about their seasoning requirements. This way you will know how long it will be until you can refi with them.

Joe Norman · Answer

Don't let one "No" stop you!  As @Adam Schneider says, not all banks are created equal.  They all generally have to comply with certain Federal guidelines (more so for owner occupied properties) and they all will have their own criteria on top of that.  Call around to small local banks, portfolio lenders, credit unions, etc and you'll find they all have different criteria for rental refinances.

Better yet - ask other local investors who they are using for BRRRR Refinances.  I think you'll find a few banks that do the majority of these deals in your area.

Jaysen Medhurst · Answer

I'm not following you at all here, @Paul Sterman. What do you mean by 20% "hard money?" 20% of what? Original cost, new appraisal? Did you wait a 6-month seasoning period? Have you called all of your local banks and CUs about the refi?

Whitney Hutten · Answer

@Paul Sterman Get a new lender!  Don't take the "no" ... rather ask "how can I...".  You have some great connections on this thread, and feel free to reach out if you need a referral or two:)

Paul Sterman · Answer

Hi Jaysen.

I was told that if I had not made payments that amounted up to 20% equity of the new appraised value that I could not refinance.  He said that would take at least two years.This is my 1st attempt. I thought using a banker that another investor uses for BRRRR would make sense, but seems like I need to look elsewhere.

Thanks!Paul

How to get a bank to do a refinance for BRRRR?

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