Cash-out Refi Process

13 Replies

Hello BP Nation,

My partner and I recently closed on a hard money loan to acquire additional properties, and are now working on the exit strategy. We have been purchasing properties since 8/13 and now own 23 units (16 fully rented). We will be using the hard money to rehab 7 units (3 properties). The properties were originally purchased with cash, but will now have a lien on them due to the hard money loan.

Being completely new to the cash-out refi process, I have the following questions:

1) Are banks requesting documentation such as: Rehab documentation (GC docs, permits, etc)?

2) Have you utilized a presentation when approaching Banks about a cash-out refi? If so, what type of information are you presenting?

3) What are typical seasoning requirements?

4) Average credit score requirements?

5 ) Avg LTV %?

6) Roadblocks when showing lien on property due to hard money loan?

Any other tips and suggestions would much appreciated!

Thanks in advance!

Ken

Originally posted by @Ken Bernstein :
Hello BP Nation,

My partner and I recently closed on a hard money loan to acquire additional properties, and are now working on the exit strategy. We have been purchasing properties since 8/13 and now own 23 units (16 fully rented). We will be using the hard money to rehab 7 units (3 properties). The properties were originally purchased with cash, but will now have a lien on them due to the hard money loan.

Being completely new to the cash-out refi process, I have the following questions:

1) Are banks requesting documentation such as: Rehab documentation (GC docs, permits, etc)?

2) Have you utilized a presentation when approaching Banks about a cash-out refi? If so, what type of information are you presenting?

3) What are typical seasoning requirements?

4) Average credit score requirements?

5 ) Avg LTV %?

6) Roadblocks when showing lien on property due to hard money loan?

Any other tips and suggestions would much appreciated!

Thanks in advance!

Ken

HI Ken,

1) Yes they will ask for these to see what you've done on the properties depending if you're selling them as a flip to the end consumer or if you're retaining them as buy and holds they may not ask. It also depends on title seasoning if you've owned the property more than 12 months typically they will not ask since its considered long term at that point.

2) I am a lender and I work with investors and have done cash out's on various type of loan scenarios ranging from recent all cash acquisitions, waiting 12 full months to cash out all contributed equity in a deal, cash out consolidation loans, etc

3) seasoning requirements depends on what value you're trying to use if you want market value typically its 12 months if you want to cash out in under 6 months its max 70% of acquisition cost (includes purchase price and closing costs and potentially documented rehab costs), after 6 months to 12 months you can cash out on the lower of appraisal or acquisition cost but the difference is you can cash out up to 75% LTV on non owner SFr and 70% on 2-4 units (conventional financing)

4) 620 fico for conventional min average varies

5) shown in #3 answer if you want more details you can PM me or go to fanniemae.com to search

6) no lien seasoning time frames if thats what you're referring to

Let me know if that helped or if you have other questions.

Hey Albert,

Great info above! I'm in a similar situation as @Ken Bernstein and was hoping you could provide some insight on my cash-out refi prospects.

I currently have 5 SFRs and 1 duplex that I have bought, renovated, refi-ed, and rented out. In all cases I bought and fixed up with personal funds, private money, and credit cards and then refi-ed using commercial/portfolio loans thru a couple small local banks. They are 4.75-5.0% fixed rate on 10-20 year amortization with 5 year balloon (renewable at adjusted rate after 5 years).

I recently closed on my 7th property and I'd like to refi into a conventional loan to lock in a 30 year fixed rate as opposed to the 5 year balloon/adjustable loans that I've been doing. My question is, are the six other financed properties I have going to put me in the loan number 5-10 category for Fannie or in the 1-4 category? (Does Fannie even do cash-out on more than four?) Title is held on the first six properties in the name of my LLC and all the commercial loans are in the name of my LLC. None of them show up on my credit report but I did have to personally guarantee them.

To complicate things further, while five of the properties are on my 2013 tax (so obviously I can't deny that I have other properties), only three of the five have a mortgage interest expense line item on my Schedule E. Would that mean this next property might only get categorized as #4 (assuming they count commercial loans), even though I have actually refi-ed the others, but after 12/31/13 so no record of the loan being tied to me.

I in no way want to do anything that would be considered fraudulent with regard to the mortgage underwriting process but want to get the best treatment I can for this next refi. Any insight would be greatly appreciated.

Also, I just wanted to make sure I read your original response correctly that if I want to pull out cash based on the appraised value that I will have to wait 12 months?

Thanks,

Jeremy

Originally posted by @Jeremy Zindel :
Hey Albert,

Great info above! I'm in a similar situation as @Ken Bernstein and was hoping you could provide some insight on my cash-out refi prospects.

I currently have 5 SFRs and 1 duplex that I have bought, renovated, refi-ed, and rented out. In all cases I bought and fixed up with personal funds, private money, and credit cards and then refi-ed using commercial/portfolio loans thru a couple small local banks. They are 4.75-5.0% fixed rate on 10-20 year amortization with 5 year balloon (renewable at adjusted rate after 5 years).

I recently closed on my 7th property and I'd like to refi into a conventional loan to lock in a 30 year fixed rate as opposed to the 5 year balloon/adjustable loans that I've been doing. My question is, are the six other financed properties I have going to put me in the loan number 5-10 category for Fannie or in the 1-4 category? (Does Fannie even do cash-out on more than four?) Title is held on the first six properties in the name of my LLC and all the commercial loans are in the name of my LLC. None of them show up on my credit report but I did have to personally guarantee them.

To complicate things further, while five of the properties are on my 2013 tax (so obviously I can't deny that I have other properties), only three of the five have a mortgage interest expense line item on my Schedule E. Would that mean this next property might only get categorized as #4 (assuming they count commercial loans), even though I have actually refi-ed the others, but after 12/31/13 so no record of the loan being tied to me.

I in no way want to do anything that would be considered fraudulent with regard to the mortgage underwriting process but want to get the best treatment I can for this next refi. Any insight would be greatly appreciated.

Also, I just wanted to make sure I read your original response correctly that if I want to pull out cash based on the appraised value that I will have to wait 12 months?

Thanks,

Jeremy

Any property in an LLC or LP or partnership where you own more than 25% of the partnership entity is counted in the "financed property," count even "if" the property is in the name of the LLC "and" the finance is in the name of the LLC.

Cash out at the 5-10 property level can only be done if you recently acquired the property with all cash purchase with all funds resulting from you in under 6 months after date you took title. There is no other way to cash out with conventional financing for 2nd and non owner homes with conventional financing.

You can find business, commercial, and portfolio financing as alternatives but you'll be hard pressed to find 30 year fixed financing in this realm.

Originally posted by @Jeremy Zindel :
Hey Albert,

Great info above! I'm in a similar situation as @Ken Bernstein and was hoping you could provide some insight on my cash-out refi prospects.

I currently have 5 SFRs and 1 duplex that I have bought, renovated, refi-ed, and rented out. In all cases I bought and fixed up with personal funds, private money, and credit cards and then refi-ed using commercial/portfolio loans thru a couple small local banks. They are 4.75-5.0% fixed rate on 10-20 year amortization with 5 year balloon (renewable at adjusted rate after 5 years).

I recently closed on my 7th property and I'd like to refi into a conventional loan to lock in a 30 year fixed rate as opposed to the 5 year balloon/adjustable loans that I've been doing. My question is, are the six other financed properties I have going to put me in the loan number 5-10 category for Fannie or in the 1-4 category? (Does Fannie even do cash-out on more than four?) Title is held on the first six properties in the name of my LLC and all the commercial loans are in the name of my LLC. None of them show up on my credit report but I did have to personally guarantee them.

To complicate things further, while five of the properties are on my 2013 tax (so obviously I can't deny that I have other properties), only three of the five have a mortgage interest expense line item on my Schedule E. Would that mean this next property might only get categorized as #4 (assuming they count commercial loans), even though I have actually refi-ed the others, but after 12/31/13 so no record of the loan being tied to me.

I in no way want to do anything that would be considered fraudulent with regard to the mortgage underwriting process but want to get the best treatment I can for this next refi. Any insight would be greatly appreciated.

Also, I just wanted to make sure I read your original response correctly that if I want to pull out cash based on the appraised value that I will have to wait 12 months?

Thanks,

Jeremy

Check with competent legal and tax advisors but one option is to assign a K1 of 24.99 to 4 family members and the 5th K1 of .04% ownership to a Scorp to manage the passive member shares so that you can have the partnership taxation benefits and still maintain your Fannie Mae qualification opportunity of up to 10 per social sec #.

Is the cash-out option you describe above the FannieMae "delayed financing" mortgage? If so, I have researched that a little bit but the biggest limitation for what I'm looking to do is as follows:

"The new loan amount can be no more than the actual documented amount of the borrower's initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points on the new mortgage loan (subject to the maximum LTV/CLTV/HCLTV ratios for the cash-out transaction based on the current appraised value)." (from fanniemae.com, B2-1.2-03)

I purchased the property for $28k and am in the process of putting about $25k into the renovation. So with closing costs, I'm all in for around $54k. Property will conservatively appraise for $80k when finished but I would only be able to pull out the $29k for original purchase and closing plus closing cost on the refi, correct? Even though max LTV is 70% based on appraised value which would be $56k?

I did make the purchase with cash so this is an option but I'd be leaving a lot of money on the table vs the commercial loan product I've been using that let's me cash out 80% of appraised value (although I'd be giving up the 30 year fixed interest rate). Also, I'd think it might be difficult to get someone to do a $30k conventional loan.

@Albert Bui , please set me straight if I'm off base on any of the info above and thanks again for your help and info.

yes that's right 29k is your max cash out unless if you find a portfolio lender and meet their time seasoning guidelines usually12 months after acquisition date to cash out based on market value.

Great topic guys! My understanding is lenders will offer purchase cost plus rehab cost but no appreciation during first 12 months typically.

delayed financing is within 6 months so you can cash out to 70% up to the acquisition cost whichever is lower which tends to be the acquisition cost on your final HUD during your initial purchase. For much lower loan amounts banks will usually have increased rates to make up for the smaller loan amount. I typically see 75k as a min loan amount but that's here in CA.

that makes good sense we buy distressed properties around the 30k range and rehab cost typically around the same. Do you lend in Chicago area? Cashouts buildings are leased and rehabbed?

we do however I would have to get an exception for the lower loan amounts

maybe we can package up. Will call you next week to discuss.

Jared - 8609138304

Well it looks like I'm probably sticking with my current portfolio lender for now then. 80% of appraised value after renovation with no seasoning requirements is pretty tough to beat even though it's only 20 year am. with 5 year balloon. Worth it in my opinion to be able to get in and out and on to the next deal.

One additional thought I just had... Would it be possible for me to deed the property to my wife, let it season 12 months, and then have her qualify on her own for a conventional cash out refi based on 75% of the new appraised value? She is not associated with any of mortgages or personal guarantees and my LLC is single member so she is not tied in thru the entity either.

Just a thought, trying to be creative here and explore all my options. Would love to hear opinions on this.

yeah Jeremy that is a good portfolio loan with no seasoning I would use that as a short term tool till you can refinance it out with conventional fixed financing. If your subject to the 5-10 property's requirements you'll need Min 6 months reserves,  min 720 fico, max ltv's are 5% lower, and only purchase or rate term refi no cash out unless it's delayed financing exception.

Your wife seasoning the property would allow her to cash out to 75% of market after 12 months assuming she has 1-4 financed properties if she has 5-10 that's a no go.

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