Lenders...what's the deal with the seasoning period?

[Scott Winter]

So, I'm staring at David Greene's BRRRR book right now pg 232...Seasoning Period 

"Many lenders don't want to finance something right after an investor buys it. This is because they want to make sure the property is stable, rented, and wasn't a "fire sale" situation.  This is one of the methods lenders use to protect their investment."  

Can someone explain the reasoning behind why seasoning periods exist or specifically how it protects the investment?

I'm in a situation where I'll be ready to refi in about 2 months of owning the property.  BRR_ ... 

I can only see my perspective, and my perspective says, "it sure would be nice to pull my money back out for the next project."  And it seems like lenders are dying for our business, but have a rule that I have to own the property for another month (some want 6 months!)?  It just seems arbitrary, so please help me to understand so I don't call every lender in the country.

[Jamal Headen]

@Scott Winter

Civic Financial Services

[Joe S.]

Originally posted by @Jamal Headen:

@Scott Winter

Civic Financial Services

 Do they now do a 30 year fixed? We used to get mailers from them, but I did not see any 30 year fixed products that I recall.

[Jamal Headen]

@Joe S.

Not that I'm aware of. I'm doing a 5/1 ARM. I would call and discuss the different products they have to offer.

[Scott Winter]

@Jamal Headen

Thanks Jamal, I'm not looking for a 5/1 ARM.

[Scott Winter]

@Eric James If I’m reading into what you’re saying, it is to not dwell on something I can’t change. To which I completely agree!

In this case, since I didn’t fully understand what the actual problem was, I wasn’t able to be able to find the most effective solution. Thanks to everyone sharing their experience, I now understand my lender search will likely be fruitless, and I can start lining up other financing options.

[Scott Winter]

@David M.

I was trying to get insight into why the limitation exists in order to fully understand why the lenders I’ve talked to so far have this requirement. Then I can determine if it is a matter of me calling more lenders or if I need to change my approach.

So far no loan officers have been able to answer the question. It is always simply a “criteria their investors have.” But the inconsistency in timing (3-6 months) indicates it isn’t regulatory, which brought me here for the collective knowledge of the BP community 🧠

[Alecia Loveless]

@Riaz Gillani I’m hopefully getting ready to do my first Refi and am wondering if the seasoning period begins when you purchase the property or when you place the tenants? Thanks!

[David M.]

@Alecia Loveless

If we are talking about existing loan seasoning periods, its when you get the loan.  its technically 6 payments.  If you are talking about getting a new loan, its technically 0 with regards to tenants.  So, you may have to find another lender

[David M.]

@Scott Winter

So here is what I know....

So, working with my favorite lender and my own research, Fannie Mae's guidelines require 6 months between change of Title.  So, that is baked into CONFORMING loans.  Any decent to good lender will tell you 6 payments are "necessary" by you, but not required.  Some know and some don't that if you extinguish the loan before 6 payments they lose their money AND get hit by a penalty.  This even applies to auto loans, for example.

Talking to some financiers, one will learn about how the Notes are resold on the secondary market, i.e. to Fannie Mae, etc.  Discount points are paid to everybody "wins" (I can't really explain it, but if want to chat send me a message and we can discuss as best i can how the bond market works).  6 months doesn't quite make the cut, but I'm sure its a compromise as a consumer protection, getting to the 1yr owner occupation requirement, and allowing an owner to potentially resell (lets face it, you can't effectively "disallow" somebody from selling).

I think the guildines to 6 months on Title is to protect the lenders and the secondary market.  Remember, the system assumes or is designed around homeowners buying with financing.  Its not about investors buying with cash, reno, this quick refi because they are trying to use the brrrr model or something.

As its been said many times, conforming loans aren't designed for investors.

I keep hearing/reading how investors aren't loyal to a lender (or real estate agent for that matter) or maybe loyal to a mortgage broker.. I think this makes the perception worse.  Lets face it, lenders and real estate agents are on commission (for the most part for lenders), its a sales position, and there is a low barrier to entry.  So, finding one that really knows what they are doing and willing to take the time to work with you is rare.  Trust me, I've spent years searching.  and even then...

To continue, lets talk about "rental seasonsing" if this was part of your topic.  The Fannie Mae guildlines to my understanding allow for the use of "expected rent schedules" when qualifying an appilcant for a loan.  However, many loan officers either don't know it or their lending firm has more stringent restrictions.  Sort of interesting / funny story...  What became my favorite loan officers many years ago has to look up and learn this fact.  So, I was able to get financing for rentals before they were rented.  A couple deals in a different loan processor gets assigned my packgae.  She starts arguing with me that my dti is too low and without a signed lease she can't include the rent for the unit I was purchasing.  I had to try to convince her of the policy, and finally called the loan officer to set this processor straight.  This being said, I have found that some lenders (i.e. the company) place additional restrictions over and above the CONFORMING guidelines.

Lets not forget that its common to speak with local / community banks...  I'm not sure if those loan officers understand whether they are originating a conforming or nonconformign loan sometimes.  But, that is the reason for going to them, for the nonconforming loan.  I wonder if it gets "messy" since if they originate a loan for you within 6payments of your current loan, they know they are screwing over your last lender.  Sort of a bit of a bind you are putting them in...

Then, there are those investors who swear by mortgage brokers...  From my limited experience, then nobody really knows whats going on.  Now you have a middle man who is hustling, doesn't seemto know or have time to know whats going in (in my limited experience), and isn't originating the loan.  they are hustling to show their worth for their origination points which I think is not worth it unless you have some rare situation or don't have the time yourself to find a lender / loan product to fit your needs.  Furthermore, many investors are hustling and only care about getting what they want, and not understanding the system so that they can use it to their advantage.

I hope what little bit of the story i can write here makes sense.  As the 07-08 crash showed, this is a very large, very involved system.  I don't think its out to get anybody, its just really big as with many to every thing in life/business/economics.  LIke I said, I'd be happy to chat.  good luck.

[Paul Higbie]

@Katherine Blazer. We specialize in working with investors who are buying value add properties and then refinance to add to their rental portfolio. We have a 90 day seasoning, 30 year fully amortization, rates in the mid-4’s and no income qualification. Let me know if we can be of assistance.

[Russell Brazil]

Appraisals use comparable sales from the last 6 months. If you purchased the property 3 months ago.....the BEST comparable sale for your property is the actual sale of your property. Its that simple. 

[Riaz Gillani]

Originally posted by @Alecia Loveless:

@Riaz Gillani I’m hopefully getting ready to do my first Refi and am wondering if the seasoning period begins when you purchase the property or when you place the tenants? Thanks!

From when you purchase the property, so the date listed on your closing statement during the purchase. Most lenders, like the company I work with, can start the process while within seasoning. But can only close on day 91 / 181.

[Katherine Blazer]

Originally posted by @Paul Higbie:

@Katherine Blazer. We specialize in working with investors who are buying value add properties and then refinance to add to their rental portfolio. We have a 90 day seasoning, 30 year fully amortization, rates in the mid-4’s and no income qualification. Let me know if we can be of assistance.

 How many points?

[John D.]

Also note you can expect an appraiser on a cash-out refi less than 6 months since purchase to be VERY conservative with the appraisal.  Perhaps not always, but often.  I typically wait until the 1 year mark when feasible.  Even then, a cash-out refi is typically going to get a lower appraisal than an arms-length sale appraisal.

[Devin Davis]

@Scott Winter PM sent

[Paul Higbie]

Originally posted by @Katherine Blazer:

Originally posted by @Paul Higbie:

@Katherine Blazer. We specialize in working with investors who are buying value add properties and then refinance to add to their rental portfolio. We have a 90 day seasoning, 30 year fully amortization, rates in the mid-4’s and no income qualification. Let me know if we can be of assistance.

 How many points? 
We charge 2 points. One of those points is to buy down the rate. 

[Andrew Syrios]

A lot of this has to do with the fraudulent appraisals that were going on prior to the 2008 crisis. It's an extra layer of protection, they're not going to let you get into an investment property with no money down (or even cashing you out if the appraisal is high enough) right off the bat because the appraisal could be BS like many were circa 2007. The same reasoning is behind DSCR requirements.

The other is simply added protection. They want to make sure you have some skin in the game, at least for a while. They want proof you can rehab and rent out the property and it will perform without financing it to the hilt. Many banks have dropped the seasoning requirement a lot. We have several that will lend to us at appraised value as soon as the property is rehabbed and rented. But they didn't start that way. Most started at a year with us and then, once we proved ourselves, dropped the requirement.

So in short, it's just added security for what is (or at least should be) a risk adverse industry.

[Jeremy H.]

Originally posted by @Scott Winter:

@Katherine Blazer

I did find a couple lenders willing to do 90 days. 90 is doable and reasonable. I just don’t understand the reasoning behind it.

I'd be interested to know what the loan terms are on a 90 day cash out refi. 

I've came across "delayed financing" where you have to leave 30% down but can get your $ between 0-6months after closing (can file for a loan the same day as closing if you wanted to), traditional cash out refi but have to leave 25% down, and some creative financing with a portfolio lender (generally the best I can get is 20 year amortization, 5yr balloon payment and slightly higher interest rates). 

The traditional and cash out refi you can get residential (assuming it's a residential property) loans, fixed 30yr, low rate etc...just have to leave a bit more in the house and wait 6 mo. 

I think it sucks but it makes sense...it's all a risk thing. Either show the property is fixed up/stable/rented (something positive) or leave a lot more money in w/ a higher interest rate (basically the bank is going to mitigate risk one way or another). It does make it difficult to access capital even if you're a high earner. 

We have banks here that will lend you up to 80-85% of the appraisal value on a flip - but the loan terms suck relative to residential loans. 

[Scott Winter]

@John D.

That’s interesting to know.

Where are you purchasing? Does holding for 1 yr work only in flat and appreciating real estate markets?

Are you using HML for acquisition or buying with cash?

- If HML, is the benefit of a higher appraisal offsetting your interest only payment cost?

- If cash, maybe I just need more cash 💰 and this problem goes away and turns into a construction labor issue. 😊

[Scott Winter]

@Jeremy H. For corporate lenders that offer 90 day seasoning, I'm seeing recourse DSCR loans offering 80% LTV, 5-5.75%, and 1-2 points.

I haven't found it to be a trade-off for seasoning and rate/LTV/points. So far, it is just "no, we can't do less than 90 day seasoning."

[Dan Bass]

@Scott Winter with such large assets on banks books, one would think this is a prudent move to protect the bank as well as a buyer. A flipper just wants the cash, a home owner has it as sometimes the largest piece of their net worth.

Imagine flippers flipping crap, home owners fitting repair bills, lack of confidence in banks to refi, less people buying houses, less homeowners buying new appliances etc to support a large piece of the nations GDP.

Banks would want to slow down flippers from selling bad products as much as they can.

Budget appropriately, sell a good product. Buyers from investors may be their first home, which right now, may be their happiest moment in a while.

[Scott Winter]

Thanks @Dan Bass for your comments. I couldn’t agree more how important is is to do work that you can stand behind. Flipping 💩 properties won’t build a sustainable business.

In this case, I plan to rent the property for the next 30 years. So the question is more about cash out refi than banks protecting buyers.

[Aaron Byrne]

@Scott Winter 

The examples listed above are very valid. It is a lender's worst nightmare to end up with paper secured by an upside-down asset as the cumbersome default management process is time consuming and chances are high that the lender may never recoup their investment. 

Another angle to consider is if the lender is a correspondent or portfolio lender. 

For a portfolio lender, they intend to hold onto the paper until maturity so they set all the rules--rates, LTVs, FICO, etc. This can be a benefit to borrowers (hard money lender requiring zero seasoning period) or a detriment (choosing to cap LTVs for properties owned less than 5 years). Essentially, portfolio lenders are the folks to approach if you are looking to work around that seasoning period as they have leeway over what risk they are willing to stomach for the note rate.

On the flip side, correspondent lenders play by a different set of rules. Instead of holding the paper to term, these lenders are looking to earn the up-front fees before selling the note in the secondary market. This allows these lenders to essentially "recycle" the cash and make money from originating loans in volume. However, these lenders typically have predetermined agreements with wholesale lenders (FNMA as a prominent example) so if the correspondent lender wants to sell the paper, they have to abide by the rules of the lender who ultimately will end up holding the paper long-term. In this situation, the wholesale lender makes little from the fees charged up front, so they want the note to last as long as possible and collect the most interest possible. For wholesale lenders, having a note pay off within the first few months is not attractive. Thus, these wholesale lenders require the paper to last for a specified period (say 6 months) before it can pay off without penalty. If the note pays off earlier, the wholesale lender may require the note be bought back by the correspondent lender, which would inhibit the correspondent lender from originating a new loan, thus hurting their model and tying up their capital. For correspondent lenders, it is common practice to establish a seasoning period of around 6 months to avoid scenarios like the ones I describe above.

There are a number of factors at play, but hopefully that helps explain a few reasons why your lender might require a seasoning period while others might not.