Refinance cash back, what is the limit?
Paul ZofsakPro Member
Investor · Cypress, TX · Member since 2013 · 118 posts · 15 votesI recently purchased a SFH, did the hard money, did the rehab, and am ready to refinance. Taking into consideration the LTV of 75% and all the other factors I was expecting about $8K back from the refinance. I found out today that I since I have not had the loan for more than six months the most I can walk away with from the refi is 2% or $2K whichever is less. Is this a Texas thing, Fannie Mae Freddie Mac, etc? Has anyone else run into this?
You need six month of ownership to be able to do a cash-out refinance.
The home value is determined by appraisal - for the first 6 months they will probably consider the purchase price when determining value.
You should be able to get a new appraisal after 6 months, but you will have to document why the value went up (invoices from home repairs, appreciation proof etc).
Cash-out in general is limited to 80% loan to value, but I think TX strictly enforces it - I know a few lenders in Utah that will go up to 85%, which you don't really want because of the mortgage insurance requirement that kicks in.
This information above is based on the assumption that this is a conventional loan we are talking about.
I do not have a Texas license, but to the best of my knowledge, they are pretty strict when it comes to cash-outs. On VA loans (that can go up to 100% cash-out) they will allow a cash-out refinance that pays off the main loan and any other debt (credit cards, car loans) but they will not allow cash-back to the borrower.
That being said, Texas is one of the states with the lowest rates of foreclosures and borrower defaults, probably as a result of stricter guidelines when it comes to financial risks (such as mortgage terms).
Thank you Dana, I have only had the hard money loan for about two weeks, have completed my repairs, and do not meet the six month cash out requirement. That explains everything then; lesson learned.
The lender I have recently spoken with will lend 75% of the purchase price for the first 6 months.
After 6 months they will give 75% of the new appraisal value. This can be done with up to 5 loans in your portfolio.
On loan number 6 it is a deferred refinance rather than a cash out refinance. At this point the maximum they will loan is the full purchase price or 75% of the appraised value, whichever is less. There is still a 6 month seasoning period which is imposed by the bank, Fannie Mae does not require seasoning for this type of loan.
On loan number 6 it is a deferred refinance rather than a cash out refinance. At this point the maximum they will loan is the full purchase price or 75% of the appraised value, whichever is less. There is still a 6 month seasoning period which is imposed by the bank, Fannie Mae does not require seasoning for this type of loan.
Fannie Mae only waives the 6 month seasoning exception if no mortgage was used to purchase the property. Such would be the case if using say HELOC to buy it out, but in this instance the HML is a mortgage so it wouldn't qualify.
this is why you sometimes have a higher rehab budget that might be totally necessary,,,over estimate your rehab cost and more is put into escrow (which you get when rehab is finished), then your refinancing the full 75%
Paul,
I am not a lender, and I don't know all the specifics about your deal. Just wanted to let you know one strategy that I know of that may be useful on this deal or another in the future.
When you make a purchase with Hard Money, you should end up with a Note and Deed of Trust recorded against the property. You can start an application the day after closing for a "rate and term refinance" but few lenders understand the process to get it done correctly. There is no seasoning period. Your new refi will be Fannie Mae, or Freddie Mac, a traditional mortgage, non owner occupied.
In May of 2013 the group I work with purchased a home with HM for $98,000.
We spent about 17k in rehab on it, and 60 days later it appraised for $162,500. We keep every receipt, and bid, and take before and after pictures to show the process. On the day after I filled the property with a lease for $1200 per month, the appraiser came in and did his inspection.
In this case the appraisal came in high enough that we refinanced the hard money, plus the HM fees, and the closing costs for the new loan (totaling about $107,500). This amount needs to be 75% LTV. That way you are only refinancing the existing loan, not taking "cash out".
Does that give you an alternative to waiting 6-12 months to do a cash out refi?
Happy to talk to you more about it.
Trevor
Trevor, you are basically advising that the hard money loan be taken for purchase + cost of rehab?
For a rate and term refinance, the lender will pay off everything owned on the hard money loan (and other liens), as long as it doesn't exceed the allowed loan to value maximum, and as long as the borrower doesn't personally want cash-back.
Rate and term has better pricing than cash-out, so if the goal is to recover the cost of the rehab only, this is a good way to go about it.
Good advice to consider.
Just so we are all clear, it sounds like some might not be, the 75% LTV that I am financing in the refi covers purchase price, all my repairs, all closing costs, and would have left me with $8k leftover at the end of the day. However since I have not had the six month seasoning period I can only walk away from the closing table with 2% of (purchase price or ARV, I don't remember which) or $2K, whichever is less. This was something I had not known about, and expecting to walk away with $8K and now only taking $2k was quite a shock to me. This is my first HML/refi deal so you live and you learn, and I'll take this knowledge with me to my next deal. Thank you all for your feedback.
For those interested below are my numbers
Purchase price, $91K
ARV, $130k
Estimated repairs, $4K
Actual repairs, $8K
Cash out of pocket at HML closing, $14K (including first years insurance and $4k mitigation fee to listing agent's firm to negotiate with lender for short sale)
For those interested below are my numbers
Purchase price, $91K
ARV, $130k
Estimated repairs, $4K
Actual repairs, $8K
Cash out of pocket at HML closing, $14K (including first years insurance and $4k mitigation fee to listing agent's firm to negotiate with lender for short sale)
That's what the above posters are trying to say, if you could have had the HML roll the costs of repairs and the closing costs into the loan balance instead of paying out of pocket you would not be looking at a cash out refi just a rate and term. This is important because rate and term are easier the cash out to accomplish.
Also I'll just in and muddy the water. What loan product are we talking about here GSE backed conventional, commercial, local bank portfolio? Some mentioned less than 6 mo being able to do a full cash out with new appraisal, that would have been a commercial or portfolio type loan product. So misunderstanding what type of loan product you need to be pursuing usually is the source of the issue.
Refi will be a conventional loan. The HML was done at an LTV of 70% which just covered the purchase price; closing costs and repairs were all done out of pocket since the appraisal came in about $14K lower than estimated. I was hoping that a new appraisal would get a higher value and I would see some cash back at refi closing to cover my out of pocket expenses, but since I have been in the house less than 6 months that won't be the case.
Are there other options? An LTV of 80% would put me where I need to be, but, once again that would involve cash back at closing which isn't going to happen with a conventional loan as far as I have been told.
Another question, so if I go with another lender the only thing that they would be able to offer me, due to regulations and standard practices, would be a better interest rate and origination fee? As of now I am looking at about $6700 in origination and settlement fees for the refi on a $99k loan. Thoughts...
Lenders will have small variations, but for the most part, they have certain limits. For example, my lender would have allowed an LTV of 80% max. on an investment property purchase, but stops at 75% on refinance.
If your property is an investment property(1 unit), a cash-out will be limited to 75%LTV. If it is a primary residence, you are looking at 80%LTV.
It's hard to say about origination costs because they depend on a lot of factors, the most important being: type of occupancy, loan to value, credit score and type of refinance (cash-out is riskier and therefore more expensive).
What you need to compare from lenders is the adjusted origination cost (page 2 of the Good Faith Estimate, at the top, line A). Everything else is pretty much the same (title fees, daily interest etc).
If your credit score isn't 740+, aim for that, it will help a lot. But you want to have at least a 680.