Question about refinancing a HML into a traditional/DSCR loan...
Member since 2022 · 36 posts · 26 votes
Question about refinancing a HML into a traditional/DSCR loan...
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Robin SimonBusiness Member
Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votesQuote from @Ned Carey:
Your equity at refinance has nothing to do with how much you put down at original purchase.
Your loan to value (LTV) is how much is the new loan you are applying for vs the current value of the property. DSCR lenders typiclaly want 70-85% loan to value. The interest rate you will get will be better as you lower the loan to value.
Partially true - generally currently equity/cost basis doesn't matter for DSCR Loans after six months of seasoning since purchase, but if trying to do a refinance within the first six months, there will typically be restrictions/limits etc.
*Note - since 4/1/23 - conventional now has these severe limits on cash-out for the first 12 months
Harpoon Capital514 Reviews
19 Replies
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
Quote from @Faiz Kanash:
Hello!
Just a question to see if this is doable... Is it possible to refinance a hard money loan into a traditional/DSCR 30 year loan if I don't have that much equity in the property? Not a cash-out refinance, just a general refinance. For example, I buy a 4 unit using a hard money loan(Interest only 12 month) but only put 5% down on the property, and after finishing fixing it up I want to keep it for rental income. But, would I be able to get a traditional/DSCR loan on it if I only have 5% equity in the property, or would the lender require me to put down additional money onto the property?
Thanks!Does it meet the DSCR cash flow requirements? Typically DSCR still require some down payment and greater than 5% but again it depends. Big question is would you be a at a 1.25 ratio with only 5% down
7e investments53 Reviews - Member since 2022 · 36 posts · 26 votes2y
Quote from @Chris Seveney:
Quote from @Faiz Kanash:
Hello!
Just a question to see if this is doable... Is it possible to refinance a hard money loan into a traditional/DSCR 30 year loan if I don't have that much equity in the property? Not a cash-out refinance, just a general refinance. For example, I buy a 4 unit using a hard money loan(Interest only 12 month) but only put 5% down on the property, and after finishing fixing it up I want to keep it for rental income. But, would I be able to get a traditional/DSCR loan on it if I only have 5% equity in the property, or would the lender require me to put down additional money onto the property?
Thanks!Does it meet the DSCR cash flow requirements? Typically DSCR still require some down payment and greater than 5% but again it depends. Big question is would you be a at a 1.25 ratio with only 5% down
Lets say hypothetically it meets the 1.25 ratio with only 5% down. Would a lender consider the refinance still?
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
Quote from @Faiz Kanash:
Quote from @Chris Seveney:
Quote from @Faiz Kanash:
Hello!
Just a question to see if this is doable... Is it possible to refinance a hard money loan into a traditional/DSCR 30 year loan if I don't have that much equity in the property? Not a cash-out refinance, just a general refinance. For example, I buy a 4 unit using a hard money loan(Interest only 12 month) but only put 5% down on the property, and after finishing fixing it up I want to keep it for rental income. But, would I be able to get a traditional/DSCR loan on it if I only have 5% equity in the property, or would the lender require me to put down additional money onto the property?
Thanks!Does it meet the DSCR cash flow requirements? Typically DSCR still require some down payment and greater than 5% but again it depends. Big question is would you be a at a 1.25 ratio with only 5% down
Lets say hypothetically it meets the 1.25 ratio with only 5% down. Would a lender consider the refinance still?
Possibly. Really depends. I can run it by one of our lenders if you want. send me a PM
7e investments53 Reviews - 2yJay HurstBusiness MemberLender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
Quote from @Faiz Kanash:
Hello!
Just a question to see if this is doable... Is it possible to refinance a hard money loan into a traditional/DSCR 30 year loan if I don't have that much equity in the property? Not a cash-out refinance, just a general refinance. For example, I buy a 4 unit using a hard money loan(Interest only 12 month) but only put 5% down on the property, and after finishing fixing it up I want to keep it for rental income. But, would I be able to get a traditional/DSCR loan on it if I only have 5% equity in the property, or would the lender require me to put down additional money onto the property?
Thanks!You state you plan to fix up the property correct? If so, the value of the property should be going up as well which would improve your loan to value. The max loan to value for a rate/term refi is 85% for a conventional loan (but the pricing is awful) and generally 80% for a DSCR loan.
Hurst Real Estate, INC4.991 Reviews - 2yMatthew BernalBusiness MemberInvestor · Austin, TX · Member since 2021 · 497 posts · 126 votes
Great question!
My initial thought, and hope, is that you purchased the property because it has high upside potential, and that after stabilizing the asset, you'll be in a better position. I'd be more than happy to take a look at your deal and brainstorm solutions with you.
I'm sending you a DM now. Hope to connect!
- 2yRaymond J. RodriguesBusiness MemberLender · Miami, FL · Member since 2017 · 1k+ posts · 797 votes
@Faiz Kanash unless your loan to value is around 80-85% at time of refinance, no lender will finance an investment property with only 5% equity in it.
Helm Mortgage Corp.5127 Reviews - 2yStacy RaskinBusiness MemberLender · Member since 2022 · 1k+ posts · 501 votes
I've never seen a DSCR loan with 95% LTV. I've seen DSCR loans with 85% LTV but the impact on pricing is quite negative.
In case you would like to know more about what goes into DSCR rates.
DSCR loans won't use your income to underwrite the loan.
DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.
Here's a bit more in detail about how rates are calculated for DSCR loans:
1. Credit score- the higher the best. 760+ generally gets best pricing for investment property loans with most lenders
2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.
3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.
4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.
I've included an example below to help illustrate this.
So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.
See example below:
DSCR < 1
Principal + Interest = $1,700
Taxes = $350, Insurance = $100, Association Dues = $50
Total PITIA = $2200
Rent = $2000
DSCR = Rent/PITIA = 2000/2200 = 0.91
Since the DSCR is 0.91, we know the expenses are greater than the income of the property.
DSCR >1
Principal + Interest = $1,500
Taxes = $250, Insurance = $100, Association Dues = $25
Total PITIA = $1875 Rent = $2300
DSCR = Rent/PITIA = 2300/1875 = 1.23
DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.
Bright Skyline518 Reviews - 2yDevin PetersonBusiness MemberLender · Sarasota, FL · Member since 2022 · 2k+ posts · 664 votessimply put - this isn't possible. Highest LTV is 85%
Quote from @Faiz Kanash:
Hello!
Just a question to see if this is doable... Is it possible to refinance a hard money loan into a traditional/DSCR 30 year loan if I don't have that much equity in the property? Not a cash-out refinance, just a general refinance. For example, I buy a 4 unit using a hard money loan(Interest only 12 month) but only put 5% down on the property, and after finishing fixing it up I want to keep it for rental income. But, would I be able to get a traditional/DSCR loan on it if I only have 5% equity in the property, or would the lender require me to put down additional money onto the property?
Thanks!
ProAlpha Capital56 Reviews - 2yDerek BrickleyBusiness MemberLender · Ann Arbor, MI · Member since 2021 · 664 posts · 226 votes
Hey Faiz!
The key would be how long you would have owned the property and then how much equity you have afterward. You could potentially refinance DSCR as long as the seasoning period has been met (varies lender to lender) and you have the minimum equity position. It wouldn't necessarily mean you have to put more down, but the repairs done on the property would hopefully get you to that threshold.
Gold Star Mortgage Financial Group548 Reviews - Investor · Fresno, CA · Member since 2016 · 222 posts · 237 votes2y
Quote from @Faiz Kanash:
Hello!
Just a question to see if this is doable... Is it possible to refinance a hard money loan into a traditional/DSCR 30 year loan if I don't have that much equity in the property? Not a cash-out refinance, just a general refinance. For example, I buy a 4 unit using a hard money loan(Interest only 12 month) but only put 5% down on the property, and after finishing fixing it up I want to keep it for rental income. But, would I be able to get a traditional/DSCR loan on it if I only have 5% equity in the property, or would the lender require me to put down additional money onto the property?
Thanks!Hi Faiz,
Great question. The short answer is yes, you can refinance a HML to a DSCR product. I've done it several times. The best advice I can give you is to look for your end lender from the beginning of the project. Let them know what you're trying to do and have them tell you what the options are. Also, speak to at least 3 lenders. There are so many products out there and no one knows everything.
A couple of clarifications: if you're only putting 5% down on the property to purchase it is likely an owner occupied loan. You can refinance at any time, but you should intend to live there at least 12 months after the initial purchase to avoid mortgage fraud. Next, if you refinance with a conventional mortgage there is a 6 month (might be 12 mow) seasoning period from original purchase.
DSCR loans aren't subject to these conforming regulations (including seasoning) so you can do a rate and term, or a cash out refinance as soon as the project is complete. However they have higher rates. Also, you will still need to meet loan-to-value metrics (75% is common). Your example is saying that you'll only have 5% equity after the rehab. I think what you mean is that you'll put 5% down on the initial purchase, do the rehab, and then have a higher property value and something like 30% equity. As long as the loan you're getting is less than 75% of the value, you can refinance. Otherwise you need to bring the remaining money as cash to close + closing costs.
What you're trying to do is get into the property, get your money back out ASAP, and then hold it as a long term rental. Right?
Best advice is to purchase this property with cash (private money if you don't have it), do the rehab out of pocket, and then get a mortgage for the home.
If you need to use HML, get 100% financing for rehab and purchase, then make sure they record a mortgage for this 100% amount. Next, you can refi via rate and term refinance DSCR loan. This is called delayed financing.
What you're trying to do can be done, but there are lots to navigate. A loan broker would be your best option here to speak with.
Best of luck!
- Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes2y
Your equity at refinance has nothing to do with how much you put down at original purchase.
Your loan to value (LTV) is how much is the new loan you are applying for vs the current value of the property. DSCR lenders typiclaly want 70-85% loan to value. The interest rate you will get will be better as you lower the loan to value.
- 2yRobin SimonBusiness MemberLender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
Quote from @Ned Carey:
Your equity at refinance has nothing to do with how much you put down at original purchase.
Your loan to value (LTV) is how much is the new loan you are applying for vs the current value of the property. DSCR lenders typiclaly want 70-85% loan to value. The interest rate you will get will be better as you lower the loan to value.
Partially true - generally currently equity/cost basis doesn't matter for DSCR Loans after six months of seasoning since purchase, but if trying to do a refinance within the first six months, there will typically be restrictions/limits etc.
*Note - since 4/1/23 - conventional now has these severe limits on cash-out for the first 12 months
Harpoon Capital514 Reviews - Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes2y
@Timothy Howdeshell sure you can apply BUT
If you get a mortgage conventional owner occupied and try to fix and refinance any DSCR lender (which is non owner only) is going to see the lie and really check that it is now a rental, and need explanation.
A hard money lender won't give you an owner occupied 95% loan. A hard money lender is going to require that you have a business purpose and a real exit plan- just magically saying you plan to refinance DSCR is not a plan. After you fix it up the real market rents are used against the proposed PITI. Depending on location rents are not par with a 90% loan to value as you have piti and mi. So let's say the SFR house is worth $275000 Chicago all spruced up and you borrow 80% PITI is $1980 you may find average rents are $1900 then you are short. If you tried to do a 90% loan to value with mortgage insurance you payment is $2620 and rents $1900 doesn't work.
- Investor · Fresno, CA · Member since 2016 · 222 posts · 237 votes2y
Quote from @Caroline Gerardo:
@Timothy Howdeshell sure you can apply BUT
If you get a mortgage conventional owner occupied and try to fix and refinance any DSCR lender (which is non owner only) is going to see the lie and really check that it is now a rental, and need explanation.
A hard money lender won't give you an owner occupied 95% loan. A hard money lender is going to require that you have a business purpose and a real exit plan- just magically saying you plan to refinance DSCR is not a plan. After you fix it up the real market rents are used against the proposed PITI. Depending on location rents are not par with a 90% loan to value as you have piti and mi. So let's say the SFR house is worth $275000 Chicago all spruced up and you borrow 80% PITI is $1980 you may find average rents are $1900 then you are short. If you tried to do a 90% loan to value with mortgage insurance you payment is $2620 and rents $1900 doesn't work.
@Caroline Gerardo I think we're getting our wires crossed. I don't advocate lying to lenders, my whole point was to talk to them to understand your options from the beginning. Correct, that you cannot refi from HML to conventional owner occupied, unless you are actually going to occupy, but that's super rare. HML only lend for business purpose, not personal residence on the front end.
And correct, HML don't do owner occupied loans. Yes, HML want a business plan, but putting a renter in and refi via DSCR is a fine business plan. My lenders have never bat an eye at that.
I'm familiar with all of this having done several BRRRRs/yr.
I don't think we're really disagreeing on anything, but I think you're misunderstanding what I wrote above. I never advocated that the OP purchase conventional and try to refi as DSCR while still occupying. He was confusing terms which is why I brought both things up together.
I stand by my original advice. Talk to a loan broker/lender.
- Lender · Nashville, TN · Member since 2017 · 205 posts · 107 votes2y
Quote from @Faiz Kanash:
Hello!
Just a question to see if this is doable... Is it possible to refinance a hard money loan into a traditional/DSCR 30 year loan if I don't have that much equity in the property? Not a cash-out refinance, just a general refinance. For example, I buy a 4 unit using a hard money loan(Interest only 12 month) but only put 5% down on the property, and after finishing fixing it up I want to keep it for rental income. But, would I be able to get a traditional/DSCR loan on it if I only have 5% equity in the property, or would the lender require me to put down additional money onto the property?
Thanks!Hi Faiz, if you are looking for a no-cash out refinance using a conventional loan, the max LTV is 75% on an investment property. IF you were living in one of the 4 units, then we could go up to 95% LTV and pay off that hard money loan with only 5% equity.
- Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes2y
@Timothy Howdeshell his first loan has to be owner occupied 95% loan then he wants to refinance DSCR.
No Hard money offers a 95% purchase loan on 4 units as his first loan.
DSCR doesn't do a 95% cash out refinance either. Fannie and Freddie new rules no 95% refinance 4 units owner or non owner.
Generally in most of America the market rents are not close to covering the full payment at high loan to values. Condos are worse as the HOA is added and insurance is exorbitant. Loan to value depending on market, person's FICO which drives the rate, and property type cash flows at 1:1 around 76% loan to value. To get DSCR numbers to work you need large equity = higher rents at higher valuation property.
So the answer is no he can't get a long term 30 year loan at 95% loan to value non owner refinance. No one offers a 95%LTV, excepting the Bank of Dad. GSE's don't do it, DSCR is a no fit to cash flow and their LTV, hard money doesn't do 30 year and they might only loan 65%.
That he asks only about hard money and DSCR I assume he cannot qualify with w-2 or two years conventional income even with the proposed rents of the other 3 units. Maybe he doesn't have 6 months reserves/ 661 FICO/ DTI too high.
https://singlefamily.fanniemae.com/media/20786/display here is fannie's rules note in red they won't buy high LTV refinances. When you add in mortgage insurance to the PITI the rents just don't cover enough. Freddie is 80% primary No cash out and 75% non owner ltv https://sf.freddiemac.com/general/maximum-ltv-tltv-htltv-rat...
Only refinance choice from hard money is something NonQM full doc, again at lower LTV than he wants.
- Investor · Fresno, CA · Member since 2016 · 222 posts · 237 votes2y
@Caroline Gerardo yes, all of that is correct. No one here ever said someone could get a 95% LTV on a DSCR or HML. I'm going to quit responding as this is distracting from the original poster's question.
- Lender · IL · Member since 2018 · 17 posts · 7 votes2y
Quote from @Faiz Kanash:
Hello!
Just a question to see if this is doable... Is it possible to refinance a hard money loan into a traditional/DSCR 30 year loan if I don't have that much equity in the property? Not a cash-out refinance, just a general refinance. For example, I buy a 4 unit using a hard money loan(Interest only 12 month) but only put 5% down on the property, and after finishing fixing it up I want to keep it for rental income. But, would I be able to get a traditional/DSCR loan on it if I only have 5% equity in the property, or would the lender require me to put down additional money onto the property?
Thanks!Hi Faiz, we do this all the time with DSCR.
- 13hErik EstradaBusiness MemberLender · Member since 2022 · 6k+ posts · 1k+ votes
Your loan amount of the DSCR exit will be based on the finished property's new market value. So you likely will have more than 5% equity if you purchased the home correctly.
Most lenders will allow you to borrow up to 85% of the property's value to payoff the existing mortgage. If you are looking to cash out, most lenders will limit you to 75-80 LTV. Keep in mind some lenders have seasoning restrictions on cash out.
Hope this helps
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