Hard money loan for 20% down payment or 100% and refinance?

Question

I am looking at going into the single family household rental business here in Michigan. Being young (22) I do not have the 20% down payment for investment real estate. Also I do not want to live on the property for a year to get an FHA loan with 3.5% down payment (even if it is a multifamily). My credit score is over 700 at all three credit unions.

I am renting a home my friends family owns for an unbelievable deal so I do not want to move out of that position.

My question is would it be wise to get a hard money loan for the 20% down payment for a conventional loan and use the CF from the rental property to pay down the hard money loan first.

OR:

Use 100% hard money and then refinance the property to one conventional loan. If I did this would I still need a sizable down payment to refinance.

My expectations of this is to have some extra income to pay down student loans which come into repayment in October. I would still work my old job while I did this.

Any and all advice is greatly appreciated.

Wayne Brooks · Answer

If you buy it as owner occupied, and don't occupy it, that's mortgage fraud....and yes, they do check.

Richard C. · Answer

Neither of your scenarios is going to happen.

Also, FYI, for my bank at least, a non-owner-occupied mortgage is 25% down, not 20%.

I also question a bit whether this would be a good idea even if you could pull it off.  You have no cash reserve, and would even be relying on the cash flow for other purposes.  What happens if the furnace needs to be replaced?  Or a tree comes through the roof?  In the latter case, you'll have insurance, but you'll need to immediately put the tenants up in a hotel for a week. Could you?

Not trying to be negative, just realistic.

The standard advice to someone in your situation would be to get a owner-occupied loan on a 3 or 4 unit building.  You might get one with a 3.5 down payment.  If it is a Homepath, you could even get your closing costs paid.  I realize that you don't want to move, but sometimes you need to make sacrifices.

Mike H. · Answer

The other thing you could look to do is wholesale to build your reserves so that you can have enough cash on hand to get the hard money loan. Or to put down the 25% you'd need to buy.  Don't forget, if you buy as a conventional loan and put down 25%, you also need to pay for the rehab out of pocket too.

Thats one of the beautiful things of a hard money lender. That being said, they're also going to want to see some experience or else they probably won't do 100% financing even if you do have the reserves.

Andy Collins · Answer

This could resolve one problem, you could be in prison so you won't have to worry about where to live,,as stated by others, this is fraud,,

Ashton Strickler · Answer

I have been thinking about it and taking on that kind of risk early on could be disastrous.

Currently I pay 300 a month to live in a very decent house, this includes everything.

Currently I have a friend that may want to rent a home from me for a year and if I did buy the house as owner occupancy I would have him live in that house and me at my current address. I would be able to do a down payment of 3.5% this way and have cash left over.

Daniella Ortiz · Answer

don't take big risks being new to rei.  Do what Richard said.  it's the most realist option.

Wayne Brooks · Answer

HML will only loan as a first mtg, and generally no more than 65-70% LTV, AND you having a minimum of 20% cash.  Your most viable option is a 3.5-5% down owner occupied loan.  If that's not satisfactory, you'll need to save up the down payment.

Ashton Strickler · Answer

Thanks those are good points, I have been doing a lot of research into costs of certain properties as this is vital for how much I can bring home each month.

Gerald Harris · Answer

The interest rate from the hard money loan will probably eat into your cash flow.   when you get a hard money loan they are looking at a property with alot of equity

1.  Find out what price you will pay for the property

2.  How much fix up it needs

3.  What will it rent for?

4. What will be the monthly expenses you will have to pay?

You may be better off finding a seller in your area who has a single family home or duplex who will carry financing for you for 10% down.   Maybe even 5% down.   They will be more flexible than a lender.   Make sure you structure the deal so that you put money in your pocket every month

Hard money loan for 20% down payment or 100% and refinance?

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