Can you cash out a conventional loan?

12 Replies

Hey Guys,

This may be an obvious question but I'm struggling to find the answer. My brother and I may be potentially going in on a future deal together (Buy, Fix and Flip). He has some cash (around $40,000) and I will generate leads and target a potential great deal to invest in. 

My Question is this: If we were to purchase a house and we are trying to pay all cash in order to get the lowest price possible from the seller. Is a Conventional loan from a bank or any other bank loan impossible to cash out or would we have to go through the route of a hard or soft money lender/OPM for the rest of the money? Trying to see if we could go for lower rates overall.

Also, my second question is if it is possible, is it true that the banks not allow you to purchase the property anyways if its in need of repair or if the offer we make is way below the fair market value?

You can do a cash out refinance using a traditional mortgage on an investment property that you own in the clear. 

> Also, my second question is if it is possible, is it true that the banks not allow you to purchase the property anyways if its in need of repair

Depends on what 'in need of repair' means. The house can have a grimy gross disgusting oven, so long as it's got an oven. Same with toilets, etc. 

The house needs to be complete and not have any health/safety hazards (that an appraiser will notice... ahem). If you find a scrappy lender, she or he will tell you what needs to be cheaply/quickly patched/fixed prior to the appraiser showing up. Tear the window security bars out if they don't have a fire release, throw some cheap co/smoke detectors up, double strap the water heater and no duct tape isn't going to cut it (CA earthquake thing), cut the 3 foot weeds back away from touching the exterior wall, get rid of that goddamn chicken seriously a "pet" chicken is not part of a vacant duplex wtf (true story), you know... that sort of thing.

> Also, my second question is if it is possible, is it true that the banks not allow you to purchase the property anyways [...] if the offer we make is way below the fair market value?

As long as it is an arms length transaction, this makes the loan LESS risky so we do not care.

I think you're saying you want to borrow money from a lender to pay the seller all his proceeds up front, rather than through seller financing. Right? Meaning you intend to borrow from someone to pay the seller, using your brother's money as down payment etc.

I don't understand what you mean by a bank loan being impossible to cash out. What do you mean by 'cash out' here? Getting a loan that includes cash to you?

Are you meaning you want to borrow the purchase price plus rehab costs? You might want to investigate a 203(k) loan. Just Google "203(k) HUD" and you'll get some good links. Or search here on BP. And yes, you can borrow from private lenders or hard money sources too.

If that's not your question, maybe you could say it another way?

I'm licensed back here in Iowa, so tagging this on just to stay compliant:
Mark Limke, Realtor, Licensed in Iowa (S62409000)
Keller Williams Greater Des Moines (F05542000)
4001 Westown Pkwy, West Des Moines IA 50266

I think you are asking about an unsecured loan type of thing. You could get a line of credit from the bank based off of your credit scores and regular income from a job. It would be better rates than hard money but higher than a mortgage. It is something to look into if that is what you are thinking. It is basically like a credit card but there are no fees for a cash withdrawal. 

@Mark Limke - "I think you're saying you want to borrow money from a lender to pay the seller all his proceeds up front, rather than through seller financing. Right?" 

- Yes that's correct. For example if I want to purchase a $140,000 property from a motivated seller for lets say $100,000 and I promise to pay him all cash. I can pay him $40,000 of my brothers money but still need to pay the other $60,000 straight up. One option is I can do a hard money lender for the rest of the 60,000 and rehab costs. However, what I want to find are lower interest rate alternatives so that I can make more profit off of the flip. So knowing that conventional loans can go for roughly between 3-5% interest rates instead of typical 8-15% for hard money lenders. I wanted to know if it's possible to pull that $60,000 cash out from the loan similar to pulling out cash from a line of credit to pay them the total up front and get that nice discount? 

Yes the seller will get completely cashed out at closing whether you pay him all cash or whether you get conventional or hard money financing. I think that is what you are asking.

@James Allen

To get conventional financing the house would have to be in livable condition. Flooring, walls, piping, etc. What I have seen typically is clients use private money for the repairs and purchase and then rate and term refinance the loan once the work is done. Another option is if you own four or less mortgaged properties you can cash out after 6 months based on appraised value. You can also cash out with delayed financing and pull out up to your purchase price and closing costs based on appraised value prior to 6 months. It is BRRR financing methods. Buy Renovate Rent and Refinance. This topic is all over BP.

@Jerry Padilla - Thanks Jerry, I'm particularly referring to paying the motivated seller all cash upfront and getting $60,000 of the total purchase amount from a bank instead of a hard money lender to get better rates as opposed to pulling out cash from a refi. From what I'm understanding so far, it sounds like you can't really pull it out but that the seller will cash out the money from the bank during closing right @Darren Budahn ? and then we just pay the bank monthly until we Fix it, flip it and then pay off that loan all together. 

@James Allen

Regardless of what financing method you use, unless it is financed by the seller, they will get the cash at closing as they no longer will own the home. You won't be able to get 100% financing for the investment property though.

    Normally "all cash  upfront" means you are not depending on a loan tied to this property to purchase it.  Since you will require a loan, your are not making a cash offer, but rather an offer that is contingent on your ability to find a loan.

     Regardless if whether your loan is conventional or hard money, the seller gets paid at the full amount closing (assuming the loan does indeed come through for you).

When you contract with the Seller you agree to pay $X.  If you have all cash for 100% of $X then you put your cash with the closing agent/attorney/title company and he puts his deed with them and they facilitate the exchange.  That is all cash.  Either you have ALL of the cash at YOUR discretion to use or you do not.  

If you only have a portion of $X and you wish to use the property as collateral for the portion needed, that is a purchase money mortgage.  The amount of cash you have is your down payment toward getting the loan and buying the property and the lender provides the balance.  The money goes to the closing agent/attorney/title company, both the down payment and the loan funds, and then is distributed to the Seller while you get the deed and the lender gets a lien.  All happens at the same time.  As a borrower you do not touch any cash.  (there are some loan programs which allow the buyer to get a purchase money mortgage and cash for rehab but we are struggling with the basic programs here, so I omit those intentionally)

A conventional lender will look to the condition of the collateral and decide if they wish to use the property as security for their loan.  Property that is in disrepair may not be suitable for all conventional lenders or they may not have a loan program which allows them to use that property as collateral.  Or the property may not appraise for the amounts agreed to with the Seller.  If the latter, you would have to supplement all funds needed to make the purchase above the amount the lender is willing to lend against their value of the property.  That value is typical established by an appraisal and some reconciliation.   

As stated above, investment property loans do not finance 100% but with the numbers used you are seeking 60% loan to value financing.  The more money you put down the more comfortable a lender will be with taking a risk on the property.  The minimum is going to be around 20% to 25% typically.  You are past that down payment demand with 40% or $40k.  We don't understand the repair capital needed.  

Hard money lenders and private money lenders will have a little bit more relaxed requirements on the condition of the property. They are willing to take more of a risk and thus charge a higher rate of interest. They also have lesser standards on credit from the borrower(s). So certain property conditions and borrower credit issues will exclude conventional loans and thus leave you with only HML and PML.

You don't say "Paying all cash and getting a loan".  If you need a loan, you are not paying all cash.  Further, you can not refinance something you do not own.  If the purchase price is $100k and you only have $40k you need to the other $60k to make the purchase.  If you get that money from a lender that will be a purchase money loan not a refinance.  The money you borrower is used to "purchase" the property.    It is not until the Seller gets 100% of the purchase price that he transfers title to you.  You can not refinance a property until after you have title to it.  

The Seller's money they get from selling the property is theirs not yours.  The Seller doesn't give you anything but the title once you have paid in full for the property. You will likely never speak to them.

There is a hint of mixing in Seller financing here but I am going to leave that along as we are struggling with the basics.