Refinancing question!

13 Replies

Hey guys, I'm buying a house with a hard money loan on a 8-month term. There's a tenant in the property with about 9-10 months left on their lease, so I'm a little worried that (if I can't get them to agree to leave upon sale within their time allowed by law) that I may or may not be able to find a buyer that is willing to wait out the lease agreement. If this happens, I'll need to refinance within the 6-8 month window after seasoning to pay back the lender.

What I need to know is: What do lenders typically require for a refinance? My credit score is crap, somewhere around 520. And I don't have a job as of about 30-40 days ago (was only a 6-month gig) to show any kind of proof of income. How does this stuff work on investment properties? I've seen other stuff on BiggerPockets talking about buying with hard money, renting, then refinancing which is pretty much what I would be doing if I can't get the property to sale. I definitely still need some help understanding this, though.

Any help would be GREATLY appreciated!

Thanks so much in advance!

This sounds like a bad idea.  A hard money lender will not typically look to the borrower's credit, income and assets.  Instead they will require a substantial down payment.  A conventional lender will look to your credit and with the low credit and no job you are not eligible for a loan.  

Buying a property with a tenant in place traditionally means any type of construction will at the very least be more complicated as the tenant and their stuff is in the way.  As an owner you will have certain rights to rehab the property but as a tenant they have a right to peaceful enjoyment.  

Nothing in this story explains why if today you purchase the property with the tenant that tomorrow it will somehow be worth more than what you paid.  So I would guess it actually won't be worth more thus this is really a zero sum game for you at this stage.  Eight months of rent likely will not offset interest and closing costs on a hard money loan all that much.  

The tenant has zero duty to vacate their lease arrangement.  It is silly to think a good plan is to buy it and hope for the best.  Why not have the current owner go inquire before you buy and convert the lease to a near term expiration if the tenant does agree?  (still a bit of an awkward request onto the Seller)

Or perhaps, see if the Seller is willing to finance over the near term, though with tenant cash flow you would probably need to give the Seller some decent upfront cash to entice the setup.  That may infringe on your hard money loan and rehab.  

I suppose third, partner with someone who could either make this an all cash deal or qualify for a conventional loan.  It is not a good idea to play Russian roulette with hard money loans.

Hi Justin,

There seems to be a lot of missing information for a good response. First it looks as if you have not purchased the property. If there is not great upside potential with the risks you already know about, why purchase it. 

Next if you are not working I would imagine your finances are tight why are you taking funds to purchase a property with great risk?

I am not saying this is a bad deal but maybe it is not the property or time to buy this now.

Pretty dangerous game, you wont be able to get conventional financing with no job and a 520 credit score.  You really aren't going to be able to do much in the rental game with your current situation.  Hard money costs too much to use long term.  If you've got the house a crazy good price, this may make sense for a flip, but it is definitely a gamble.  Why only 8 mos on the hard money loan?  I'd shop that loan some and go 12 mos to give yourself some cushion.  

@Mark Bookhagen

 @Dion DePaoli

@Wayne Brooks

@Louis Jeffries

@Darrell Shepherd

In hindsight, I left out a lot of critical information. Sorry about that. Okay, I've already been "pre-approved" for the purchase price of the property after filling out a fairly extensive application. Beyond that, I've spoken with one of their agents and verified the numbers, etc. This property has already been rehabbed (about 6-7 months ago) and needs zero work. I'm buying it at a 32% discount from the current FMV. There's room for about $37,800 gross profit not including rental income. It's being rented for about $1,000/mo and my lender will not charge payment for the first 5-months (that's their claim, but it's actually rolled into the original purchase price / loan amount). So I'll have the rental income straight-up for the first 5 months. Further, my girlfriend is working a full-time job but likely doesn't have much better credit than me. We're young and don't so much have bad credit history, as opposed to no credit history. Would the bank include that income + the rental income alone being twice if not triple the monthly mortgage payments? Paying the loan would be no problem at all, and neither would representing that claim. But I know banks have their requirements regardless of what I can provide, and that's one of the things I was trying to get a better feel for. Also, I'm not very familiar with having a lease converted to a near-term expiration. At this point, it would honestly be profitable for me to pay the tenants off to get them to terminate the lease at an earlier date, considering I'll be reimbursed any of the 5-months ( at 18% APR) I mentioned above and that was paid in advance that I do not use. And it's on an 8/mo term because that's all the HML would allow. If I left anything out, ask me and I'd be happy to answer. My brain's just been racked these past few weeks. But any questions will be provided an answer.

Thank you guys so much for the info and guidance!

Ok Justin, 

Numbers make a difference.  Not sure of exact math but @ 18% you are rent ing at a loss. I know long term HMLs with rates around 12% that would still be at or near a loss. So problem is really who you are going to sell this to. If this is a great property in an in demand neighborhood. Maybe this is a god deal but you have to ask yourself if the property has been fully rehabbed and rented out why is seller selling so low? Is it becuase they can not find a retail buyer.

Second point. You and your girlfriend should be working on repairing your credit. 6 months should be plenty of time to build your score to the mid 600's if there are no major derogatory items.

@Justin Todd

Keep in mind if you're buying it at a discount and it needs no work, then your purchase price becomes the new value, especially for conventional lenders.  Maybe after one year you can have it appraised and the higher values in the area can be used.  Also remember if it's a rental, they're only going to lend 75% of the newly appraised value.

All the above doesn't matter if your credit score is 520 - you won't qualify. If you can't sell or refinance, then you'll lose the place to the HML also have a foreclosure on your credit. Doesn't seems like this deal is worth the risk, IMO.

- Tom

@Louis Jeffries

Yeah, I understand what you mean about the rent being at a loss, but that's why I'm looking to flip rather than hold long-term (the only way I would do that would be if I could refi). Beyond that, as unavailing as this might seem, the owner is selling at a discount for a reason that I'm well aware of but won't mention. So I've covered my butt there.

@Tom S.

I've never heard that before. How does that work? For instance, if a family member were to sell their property to another family member for $10 or whatever amount they choose, that surely wouldn't hold any water. I'm curious to hear about this

@Justin Todd

Transactions between family members are different, because they're not an "arms length" transaction. What I'm saying is that even if the FMV of the house is $100k and you buy it for $70k (and no repairs are needed), the property is now valued at $70k, because that's what someone was willing to pay for it. A conventional lender will always use the appraisal value or purchase price, whichever is lower.

Now if in a year the comps are still worth around $100k, then you might be able to get it reappraised after owning the property for a year or so (depends on the lender). The point is that even if you're buying at a 32% discount to FMV, the bank is not going to instantly lend against that.

Hope that helps clarify it.

- Tom

Originally posted by @Tom S. :

@Justin Todd

Transactions between family members are different, because they're not an "arms length" transaction. What I'm saying is that even if the FMV of the house is $100k and you buy it for $70k (and no repairs are needed), the property is now valued at $70k, because that's what someone was willing to pay for it. A conventional lender will always use the appraisal value or purchase price, whichever is lower.

Now if in a year the comps are still worth around $100k, then you might be able to get it reappraised after owning the property for a year or so (depends on the lender). The point is that even if you're buying at a 32% discount to FMV, the bank is not going to instantly lend against that.

Hope that helps clarify it.

- Tom

What I'm hearing is 6 and 12 months "seasoning". This means what Tom said above is true for AT LEAST 6 months and I'd count on 12. Lots of banks will say one thing (6 months, 520 credit, no problem!)  but once the loan goes for underwriting, that's a whole other ball of wax. 

@Justin Todd

You will have a very hard time lender that will give you a loan with under a 620 credit score on an investment property........ I don't know of any lenders that go that low. I don't want you to have false hopes. Also you will need to have a steady job as well. The rental income alone won't be enough to support the loan being a new investor with other debts you may have and your own rent, as well as this mortgage.