Record second lien to do rate and term refi?

Question

Hey guys,

Here is my situation. A couple months ago I purchased a SFH for 57.5k, put 6k into rehab with a loan of 50k. It will probably appraise for 85-90k, so at 75% LTV it will come out to about 64k loan amount. My question is if I get a second lien recorded of say 15k am I now eligible to do a rate and term refi to take out both liens?

Thanks in advance!

Jesse Gonzalez · Answer

@Bryce Y.   You cannot get a rate and term refinance when paying off a loan that was not used to purchase the property if you're planning on going with a fannie mae loan.  The loan type would be considered cash out.  From the fannie mae selling guide regarding acceptable uses of funds, "paying off a subordinate mortgage lien (including prepayment penalties) used to purchase the subject property. The lender must document that the entire amount of the subordinate financing was used to acquire the property;"

Bryce Y. · Answer

Thank you, appreciate the help!

Dion DePaoli · Answer

@Bryce Y. 
	
	You can add them to the title of the property and then get a loan, that is no problem.  They may be required to sign off recognizing the senior interests granted to the lender and may not be required to be on the loan.  So they sign title but not the note however they acknowledge the mortgage.  Not uncommon.
	
	You would want to add them to title before you refinance conventionally otherwise post refinance you are tripping over due on sale, conveying interest in the property subject to the mortgage.  Some lenders will not worry too much about adding someone to title as it may be perceived as adding someone else to help make sure the debt service occurs.  If you remove yourself in the process, the view will be different.  If this ever pops up, no harm in asking the mortgagee.
	
	You kicking in $7.5 does not change anything.  If you pull more than 2% from the property with a lien then they likely will call it cash out when you refinance, you simply cashed out before getting the loan.  
	
	Different lenders will have slightly different rules so it is worth chatting up some about the situation.  Explain what you are trying to accomplish and see if they give you some guidance.

Bryce Y. · Answer

Thanks Dion. I don't think adding them to title is feasible since I am looking to refi into a conventional loan, and as far as I understand title must be solely in the borrower's name.

The property is stabilized so none of the 2nd lien amount would go directly into the property via rehab.  However, I did kick in 7.5k towards the purchase, all rehab and CC, and proof of that should be no problem.  Do you think this would be sufficient for a lender?

Dion DePaoli · Answer

Well, I need to add one more idea to this too.  Sometimes if the proceeds from the second lien are not from the original purchase they may simply consider it cash out to refinance the loan.  Some lenders may relax the idea as long as the funds went into the subject property, which they will force you to prove it.  If they did not go into the subject property for say rehab or an addition, then they will treat it as cash out.  You simply cashed out prior to the refinance.
	
	With the family member thing, they will likely want to make sure no funds from the refinance go back to the borrower.  Like trying to use a portion of the proceeds as early disbursement of profits to everyone.  
	
	Some portfolio lender's may have different versions of this so you may still want to ask around.  Since it is a family member in second and first, you may simply think of getting the loan and adding them to title with a side agreement of how they get paid back.  There are several ways to convert their debt into equity if that is feasible for all of you and some things may be eaiser to go do.

Bryce Y. · Answer

So if I use a family member for the 2nd lien (1st lien is family member) would that not be arm's length?  I would need to use a HML?

Dion DePaoli · Answer

If the lenders are arm's length from you then yes, refinancing both liens would fall under rate and term and not cash out.