Hadn't counted on this curveball - refinance woes

25 Replies

In July, my husband and I invested $112,000 in a single family home.  We financed it through a mortgage company with 20% down obtained by selling stocks. After putting $3500 into it, the home is now valued at $150,000. 

We are now under a due diligence contract for a $190,000 4 plex and planned to refinance the first one to pull the equity out for 20% on this purchase.  Lender says I have to wait A YEAR to do a cash-out refinance.  Not sure how I missed that little detail.  Now we are faced with pulling funds from 401K (we are over 59 1/2 - tax but no early withdrawal fee) to cover the down-payment and cost to finance. 

Where did we go wrong? What should we have done? Is it too late to go another direction? 

Hello:

Just to clarify, your original lender on the SFH won't let you refi OUT of their loan for a year? Or to refi WITH them?

If you can refi with someone else, go that route.

If it's 1 year to refi with anyone, or what?  Is there a fee or fine?  You can run those numbers to see if it's worth it.

Regarding your 401k, you could always take a loan rather than withdraw.  You can get up to $50k.

Finally, you could try to find a small bank that will cross-collateralize and accept the equity in your SFD as collateral/down payment on the second home.

Bob

The original loan was with someone another lender.  This lender says is is a fannie mae rule.  He says it is a years wait to refi with anyone.

Great idea on the cross-collaterizing!

Clarification, it’s a year to “cash out” refi. We could refi if there was a “benefit”, just not cash out.

HELOC property #1. The bank will give you a equity backed loan with a balloon payment in the future up to 70% of the ARV. The only problem is that you will now have a payment against it if you spend it (which you would on the down payment for property #2) and you will have difficulty (I think) refinancing property #1 in the future with a active HELOC on it.

@Tookie Nemchak , unless I'm missing something, even if your Lender did agree to a "cash out" after only 4 months, I'm not convinced you've achieved enough additional equity to qualify to get enough to cover you for your deposit for a property that's costing 70% more than your first one. 

Right? Good luck...

Hi. Seems to me the numbers don’t work for a refinance. You have $38k equity. ( $150k-$112k cost). And you need $38 k equity to put 20% down on the $190k new purchase. there are closing costs on the new purchase you’ll need to fund. Plus you can’t pull out 100% of your equity on a refi or line of credit from the existing property. The bank will likely want loan to value close to 80%. Maybe a little more. Adding $ from savings, 401k or elsewhere seems necessary.

Updated 7 months ago

correction $150k x80% mtg = $120k new loan less $89k existing mtg payoff leaves about $30k potential cash out

My response would be to use your 401K money to purchase the 4-plex. Individual retirement plans were developed for people who do not know how to manage their money and save for their future. Government designed it so the retirees would not be a burden on the government once they stopped working. A smart real estate play will always out perform what you are gaining on your retirement plan even after penalty and tax. You have to make sure the numbers pencil out on your real estate investment before you commit your retirement funds. Good luck.

Originally posted by @Brent Coombs :

@Tookie Nemchak, unless I'm missing something, even if your Lender did agree to a "cash out" after only 4 months, I'm not convinced you've achieved enough additional equity to qualify to get enough to cover you for your deposit for a property that's costing 70% more than your first one. 

Right? Good luck...

 Good catch, we have the rest in cash.

Originally posted by @Richard B. :

Hi. Seems to me the numbers don’t work for a refinance. You have $38k equity. ( $150k-$112k cost). And you need $38 k equity to put 20% down on the $190k new purchase. there are closing costs on the new purchase you’ll need to fund. Plus you can’t pull out 100% of your equity on a refi or line of credit from the existing property. The bank will likely want loan to value close to 80%. Maybe a little more. Adding $ from savings, 401k or elsewhere seems necessary.

 Your correction is correct. We have some cash. It would have been enough with the cash out, but now we are looking at pulling from 401K.  The 401K doesn't loan on investment property so the only option is to pull it out and pay the tax burden.

Originally posted by @Tookie Nemchak :
Originally posted by @Richard B.:

Hi. Seems to me the numbers don’t work for a refinance. You have $38k equity. ( $150k-$112k cost). And you need $38 k equity to put 20% down on the $190k new purchase. there are closing costs on the new purchase you’ll need to fund. Plus you can’t pull out 100% of your equity on a refi or line of credit from the existing property. The bank will likely want loan to value close to 80%. Maybe a little more. Adding $ from savings, 401k or elsewhere seems necessary.

 Your correction is correct. We have some cash. It would have been enough with the cash out, but now we are looking at pulling from 401K.  The 401K doesn't loan on investment property so the only option is to pull it out and pay the tax burden.

Did you check Bob Razler's idea out? He wrote: "Regarding your 401k, you could always take a loan rather than withdraw. You can get up to $50k". Looks like a good option to me...

Originally posted by @Brent Coombs :
Originally posted by @Tookie Nemchak:
Originally posted by @Richard B.:

Hi. Seems to me the numbers don’t work for a refinance. You have $38k equity. ( $150k-$112k cost). And you need $38 k equity to put 20% down on the $190k new purchase. there are closing costs on the new purchase you’ll need to fund. Plus you can’t pull out 100% of your equity on a refi or line of credit from the existing property. The bank will likely want loan to value close to 80%. Maybe a little more. Adding $ from savings, 401k or elsewhere seems necessary.

 Your correction is correct. We have some cash. It would have been enough with the cash out, but now we are looking at pulling from 401K.  The 401K doesn't loan on investment property so the only option is to pull it out and pay the tax burden.

Did you check Bob Razler's idea out? He wrote: "Regarding your 401k, you could always take a loan rather than withdraw. You can get up to $50k". Looks like a good option to me...

 We checked... this 401K will only loan on primary residence. I know, it sounded like a great idea. 

What about a different lender and portfolio loan? No idea if it'd work (and you'd hit higher rates) and you run the risk of the appraiser not agreeing with your amount (if too low defeats the whole purpose).

Some banks only provide 60% - 70% LTV on helocs using rental property equity.

@Tookie Nemchak I would talk to a smaller local bank. They are more willing to be flexible and might allow a re-finance now without the "seasoning" period of 1 year.

Originally posted by @Tookie Nemchak :
Originally posted by @Brent Coombs:
Originally posted by @Tookie Nemchak:
Originally posted by @Richard B.:

Hi. Seems to me the numbers don’t work for a refinance. You have $38k equity. ( $150k-$112k cost). And you need $38 k equity to put 20% down on the $190k new purchase. there are closing costs on the new purchase you’ll need to fund. Plus you can’t pull out 100% of your equity on a refi or line of credit from the existing property. The bank will likely want loan to value close to 80%. Maybe a little more. Adding $ from savings, 401k or elsewhere seems necessary.

 Your correction is correct. We have some cash. It would have been enough with the cash out, but now we are looking at pulling from 401K.  The 401K doesn't loan on investment property so the only option is to pull it out and pay the tax burden.

Did you check Bob Razler's idea out? He wrote: "Regarding your 401k, you could always take a loan rather than withdraw. You can get up to $50k". Looks like a good option to me...

 We checked... this 401K will only loan on primary residence. I know, it sounded like a great idea. 

If your primary still has sufficient equity, why not take an additional loan on it? You're only shy about $30-40k, right? (But you might as well apply for the maximum!) 

[Of course, if you don't have sufficient equity, you really do like living on the edge!]...

@Tookie Nemchak you should have a 401k loan option that is not tied to RE. That option typically has a shorter repayment period but two major advantages IMHO. The first advantage is the tax savings and the second is that you would be paying yourself interest instead of somebody else. If you can swing the extra payments due to the shorter repayment period this may be a much better way to go. Also, you can typically acquire the funds from your 401k a little faster this way than for a RE 401k loan.

Look into doing a rollover to either a self directed IRA or a ROBS 401k (Roll Over Business Startup), perhaps you delay the taxable distribution. Good luck. Carol

***UPDATE**
When the sellers realized we were struggling to work this out, they offered us Seller Finance! Reasonable interest rate and 5 year balloon. Closing before Christmas. Obviously we are thrilled.

Outstanding!  Congratulations.

Carol

To further convo, do any RE attorneys know how the Fannie law apply a here? Do fed backed banks not allow cash outs before 1 year?

Thanks

Tom

Hi Tookie,

Thanks for sharing your story. Regarding your question about refinancing and cashing out the equity in the home, the Fannie Mae guideline states:

“The property must have been purchased (or acquired) by the borrower at least six months prior to the disbursement date of the new mortgage loan except for the following...”
The exemptions to this rule being if the property was purchased with all cash and qualified under the delayed financing rule, or if the borrower acquired the property through some form of inheritance (Divorce, etc).

With all that being said, most lenders have an overlay of twelve months for refinancing. You had mentioned you’ve attained seller financing, congratulations on that! I️ wish you the best going forward with your investments.

For reference, here is the Fannie Mae cash-out refi page I️ pulled the info from:

https://www.fanniemae.com/content/guide/selling/b2/1.2/03.html

Take care,
Tony

Check the local banks —. Commercial loans, many hold their own paper (don’t sell it to the market) and the might want the current loan to season but they can wave that. I have a bank here I use for that very thing...it is about 1% or so higher interest but i wouldn’t think that would impact you numbers much

Anybody that sells their loans back to the market will have this as a requirement, locally held loans the lenders can and do make exceptions

Originally posted by @Tookie Nemchak :

In July, my husband and I invested $112,000 in a single family home.  We financed it through a mortgage company with 20% down obtained by selling stocks. After putting $3500 into it, the home is now valued at $150,000. 

We are now under a due diligence contract for a $190,000 4 plex and planned to refinance the first one to pull the equity out for 20% on this purchase.  Lender says I have to wait A YEAR to do a cash-out refinance.  Not sure how I missed that little detail.  Now we are faced with pulling funds from 401K (we are over 59 1/2 - tax but no early withdrawal fee) to cover the down-payment and cost to finance. 

Where did we go wrong? What should we have done? Is it too late to go another direction? 

 A one year wait is actually an overlay, six months is the Fannie minimum. Link. Find a different lender. 

We closed yesterday with the owner finance. Thanks everyone for your guidance. Now to get this 4-plex rented out. I’ve learned a lot through this process. #90daychallenge ... ☑️

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