Hard money to VA loan for primary residence
Flower Mound, TX · Member since 2014 · 33 posts · 17 votes
A friend of mine asked me a question regarding buying a distressed property, using hard money to pick up the house and rehab it, and then if it was possible to use his VA loan for this property as it would be his primary residence and he could finance at 3.5% down - primary residence. He is a Veteran of the Gulf War and and is moving to the DFW area.
Does anyone have any experience with this and if this would be possible to do with first using hard money to purchase and rehab the property, and then using the VA loan for a primary residence? Or, what restrictions the VA might have with allowing someone to do this.
Thanks for viewing my post, and thanks in advance for any and all responses.
Yes he can payoff the hard money with his VA financing benefits via the VA loan program.
He could also cash out to 100% of market value as well.
How Veterans can Leverage their benefits to Create Wealth through RE
Yes it can be done, on hiccup in the plan though.
With the new Dodd-Frank issues surrounding extending credit to consumers, there are likely no HMLs that will fund the purchase. They stay out of the DF arena by only funding commercial or business purchases. Your friend will likely not be able to get a loan with them since they will be asking what his intention is with the property. As soon as he says personal residence it will kill the deal. If he doesn't say personal residence, he will likely then have issues with the VA refinance since it won't be vested in his name....catch 22.
Thanks for the responses. @Matt Devincenzo I understand the point about the hard money not lending due to the primary residence. @Albert Bui - Since this would be a primary residence, wouldn't getting a conventional loan as a primary residence be much easier - that is, since it would be a primary residence? This would make the expenses of the HML go away, and still allow him to buy a distressed property using a conventional loan, using money out of pocket to rehab it, then refi it over to the VA loan. Would this work?
@Jimmy Wilson You could use either VA or Conventional however if you wanted to cash out (obtain a refinance higher than the current amount owed in an attempt to get cash back) you will encounter title seasoning requirements with Conventional financing which is a min of 6 months to cash out while with VA (if you're a veteran with entitlement available) you can cash out to the maximum allowed by VA guidelines which is 100% of market value and VA has no title seasoning requirements similar to conventional financing. This one little key differentiation could be the difference of thousands of dollars and lost opportunity.
VA can go to 100% cash out of market value
Conventional can only cash out to 85% on a primary (most cases only 80% because MI is too expensive on cash out) and you have to deal with title seasoning requirements and LTV restrictions on cash out.
Most of us are not veterans so conventional is all we have, but perhaps you might be one.
VA qualification is more lenient than conventional as well and rates are much lower when considering to cash out all else equal.
@Matt Devincenzo @Albert Bui @Jimmy Wilson
Thinking outside the box... Could an LLC be formed to hold title for the rehab/flip house with the intention of profit, not primary residence, to find the hard money? Once the rehab is complete, could the property then be purchased by the friend as a primary residence with VA financing as an original mortgage at full market value, not a re-fi? I'm not familiar with the inner workings of Dodd-Frank (isn't it hundreds of pages?) or hard money and am not a lawyer so don't beat me up too bad if the answer is no.
Obviously the friend would have to disclose the hard money loan on his financials when applying for the VA loan so would still have to make the numbers work. There might be tax considerations on the business profit since it wasn't a re-fi loan against equity, but all rehab costs would be deductible plus other legitimate business expenses, and the profits (equity) could be rolled into another real estate investment via said LLC... Might not be a viable solution but like I said, just trying to think out of the box to get the deal done.
Thoughts?
-Jeff
@Matt Devincenzo @Albert Bui @Jimmy Wilson
Thinking outside the box... Could an LLC be formed to hold title for the rehab/flip house with the intention of profit, not primary residence, to find the hard money? Once the rehab is complete, could the property then be purchased by the friend as a primary residence with VA financing as an original mortgage at full market value, not a re-fi? I'm not familiar with the inner workings of Dodd-Frank (isn't it hundreds of pages?) or hard money and am not a lawyer so don't beat me up too bad if the answer is no.
Obviously the friend would have to disclose the hard money loan on his financials when applying for the VA loan so would still have to make the numbers work. There might be tax considerations on the business profit since it wasn't a re-fi loan against equity, but all rehab costs would be deductible plus other legitimate business expenses, and the profits (equity) could be rolled into another real estate investment via said LLC... Might not be a viable solution but like I said, just trying to think out of the box to get the deal done.
Thoughts?
-Jeff
I've seen deals like that done all the time in the form of joint ventures, partnerships, and other. You're saying to purchase with hard money at a lower value, fix, and flip the property with the take out financing from a party that is a partner right? I tend to see this with conventional financing. The Joint partner would use and exhaust all of their 10 financed properties and new partners would be added to accommodate additional more conventional loans as needed. After conventional financing is secured it pays off the hard money and the property is transferred into the JV entity, a LLC.
Upon further research, it seems that TX is one of the only states that will not allow a cash out (up to 100% for VA loans) refi for VA loans. I am not sure how this effects the scope here. Meaning, if you came out of pocket to make up the difference between the 70% ARV for hard money, and then had, say, $40k out of pocket for the rehab, pulling your difference (the $$$ you forked out for closing costs and the rehab) out after refi to a VA loan might be a big issue for someone in TX.
Or, maybe I am just not thinking in the optimal *creative* way that might make this work. Any ideas?