Rental Property Investor · San Antonio, TX · Member since 2011 · 512 posts · 290 votes
So our first BRRRR property was moving along great. We paid cash and renovated and received a great appraisal. Lender said my retirement account would count as reserves (since we would spend most of our liquid cash on the project). Now that we are going through underwriting they say they can't use these funds.
I was surprised they would count them originally but they checked with an underwriter and the underwriter said yes.
Now my best deal yet may turn into an unintentional flip. I really want to refinance the property and keep it. The irony is that the moment after closing I would have double the required funds. I knew they wouldn't count them as reserves but asked anyway. I was right.
I am asking for some brainstorming ideas from this community to help me save the deal and free up my cash. I am probably short about 14k on reserves required. I don't think they will allow gifted money for reserves. I don't think they will allow borrowed money either. I am now looking for portfolio lenders in San Antonio or other options. Please let me know what you think if you have any ideas.
My preferred exit strategy is to refinance it and keep it for a rental. A distant second concern is if I have any recourse for being misinformed by the lender. I based my strategy on what seems to be misinformation.
Thanks in advance for any ideas you may have to help me resolve this dilemma.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
10y
Will Pritchett Will if it's something you really want to do get a commercial loan. The down payment is a little higher and the interest is a bit more but they will lend to an LLC and don't care how many loans you have. There will be a balloon and refi down the road a few years. Mine have a 25 year amortization. These loans are based more on the performance of the property than your personal finances.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
10y
Will Pritchett Will if it's something you really want to do get a commercial loan. The down payment is a little higher and the interest is a bit more but they will lend to an LLC and don't care how many loans you have. There will be a balloon and refi down the road a few years. Mine have a 25 year amortization. These loans are based more on the performance of the property than your personal finances.
Rental Property Investor · Beaumont, TX · Member since 2015 · 161 posts · 77 votes
10y
@Will Pritchett seems like it is time to take your business elsewhere. The underwriter's reserve requirements don't make sense. I'm certain that there is another lender out there that would be happy to do the deal and know how to underwrite the loan. What type of lender and loan are we talking about here? A conventional loan from a Big national bank? Portfolio loan from a Small local bank?
As @Ralph R. noted earlier, commercial is a good alternative also. That's what I'm using currently, from a local credit union. Quick and easy underwriting process.
Rental Property Investor · San Antonio, TX · Member since 2011 · 512 posts · 290 votes
10y
@Chris M, @Ralph R, ,@Shaun Weeks, @Alex Saleeby. Thank you all for your responses. They say the funds aren't immediately accessible and that is why they can't use them. I used a 457 plan which is like a 401-K pretty much. This is with a mortgage broker and a conventional loan. I was planning on maxing out my conventional loans before going commercial just to lock these rates without balloons and refinances. I know those are in my future. This is loan number five so reserves required keep getting higher. This would be the first one in which I can refinance and get my purchase money completely back to reuse if the loan goes through.
Chris and Shaun, you both seem to agree that my retirement account should suffice which gives me some peace of mind. Either of you make loans in Texas? If this falls apart, I will be shopping around. When you both said the funds should be allowed, I am not of retirement age; just to clarify. I also have a pension I didn't include, would that be useful for this as well? We're y'all referring to conventional loans?
Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
10y
Time to go somewhere else bud; I recommend commercial for the long haulers who want to build a empire. If you have family that is willing to lend you the cash, by all means do so and wrap up the deal. If they are not going to accept the retirement accounts, just pull the 14k out of it. It's none of their business where it comes from.
Rental Property Investor · Malvern, PA · Member since 2016 · 1k+ posts · 934 votes
10y
@Will Pritchett - Does your 457 plan have a loan feature? You might be able to leverage that to either show you could get the funds quickly if needed or actually use it to get the funds. A retirement plan loan might not count as a loan with your lender since it is already your money. Similarly, you could show you would withdraw from your plan with penalty and interest in a short period of time. Timing and what you can do all depends on the plan rules. I took a loan from my 401k and had the money about a week after applying.
The underwriters can be a bit like drones just following guidelines as if they are not permitted to think. It might help to engage your loan officer or broker for "thinking" assistance to help the underwriters since the loan officer may be in a better position to escalate the issue and should be highly motivated as he/she doesn't get paid if you don't get your loan. The underwriters just need to satisfy a checkbox.
It would be a shame to get this far and have to start over with another lender. I recommend pushing this as far as you can with this lender, especially if you can show you followed this path based on the lender's up-front guidance.
Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
10y
Security Service is one of the biggest credit unions around here. They should be able to help. If you cant get ALL of your money back in your pocket, get some of it back.
The big thing for doing more properties is to ask all sellers to finance at least part of the deal and ask friends and family to finance from their retirement or money that they have in CDs. Gotta network.
Real Estate Broker · San Antonio, TX · Member since 2016 · 234 posts · 85 votes
10y
Will,
As others have stated there should be no issue using a 457 as reserves. I just purchased my primary residence last December and my 457 was my reserves. If you are still active in the job that provides the 457 then you are usually only able to take a loan for around 50% of your balance, so that is what they will calculate as your reserves. I can provide some lenders for you to call if you want to PM me.
Thank you.
Sounds like a Fannie Mae loan...and that's were you'll be able to get the lowest interest rates (now 4-5%) available. And if it is a Fannie Mae loan, that's not correct. They have new requirements. They will ONLY count liquid funds.
All other lenders (portfolio lenders, securitized lenders, etc.) will only have loans available at 6% and up, most of which will require at least 25% down...many 50% down.
So our first BRRRR property was moving along great. We paid cash and renovated and received a great appraisal. Lender said my retirement account would count as reserves (since we would spend most of our liquid cash on the project). Now that we are going through underwriting they say they can't use these funds.
I was surprised they would count them originally but they checked with an underwriter and the underwriter said yes.
Now my best deal yet may turn into an unintentional flip. I really want to refinance the property and keep it. The irony is that the moment after closing I would have double the required funds. I knew they wouldn't count them as reserves but asked anyway. I was right.
I am asking for some brainstorming ideas from this community to help me save the deal and free up my cash. I am probably short about 14k on reserves required. I don't think they will allow gifted money for reserves. I don't think they will allow borrowed money either. I am now looking for portfolio lenders in San Antonio or other options. Please let me know what you think if you have any ideas.
My preferred exit strategy is to refinance it and keep it for a rental. A distant second concern is if I have any recourse for being misinformed by the lender. I based my strategy on what seems to be misinformation.
Thanks in advance for any ideas you may have to help me resolve this dilemma.
-Will
One way to get around the "gift" requirement is to have the money given to you and sit in your account for at least 60 days before you acquire property. If the money's been weathered 60 days, most lenders can and will count it. Another way is for the money to be "payment" for something you've provided them, but you will have to have some form of documentation for this (ex. a receipt and/or letter, etc.)
Chicago, IL · Member since 2015 · 298 posts · 261 votes
10y
I have used retirement funds as reserves for my last 2 conventional loans so im pretty sure you should be able to use it for your refinance. If that lender does not allow it then it is time to go find another lender. Also some lenders allow you to use borrowed funds as long as you can show where the money came from and they incorporate the monthly payments resulting from the borrowed funds into your DTI.
Sounds like a Fannie Mae loan...and that's were you'll be able to get the lowest interest rates (now 4-5%) available. And if it is a Fannie Mae loan, that's not correct. They have new requirements. They will ONLY count liquid funds.
All other lenders (portfolio lenders, securitized lenders, etc.) will only have loans available at 6% and up, most of which will require at least 25% down...many 50% down.
Just to be more detailed if you have a 401k which I consider a retirement account the funds in the 401K can be used for reserves. If it's a retirement account that you can't pull money out of until you're retired or over 55 then you can't use that as reserves.
Some people move their retirement funds into stocks, bonds mutual funds etc. It's still their retirement but it's now liquid and can be used for reserves.
I should have asked what type of retirement account you're using be saying 100% acceptable.
Sounds like a Fannie Mae loan...and that's were you'll be able to get the lowest interest rates (now 4-5%) available. And if it is a Fannie Mae loan, that's not correct. They have new requirements. They will ONLY count liquid funds.
All other lenders (portfolio lenders, securitized lenders, etc.) will only have loans available at 6% and up, most of which will require at least 25% down...many 50% down.
Just to be more detailed if you have a 401k which I consider a retirement account the funds in the 401K can be used for reserves. If it's a retirement account that you can't pull money out of until you're retired or over 55 then you can't use that as reserves.
Some people move their retirement funds into stocks, bonds mutual funds etc. It's still their retirement but it's now liquid and can be used for reserves.
I should have asked what type of retirement account you're using be saying 100% acceptable.
Shaun,
With all lenders I've worked with in the last year, if you're trying to obtain a Fannie Mae loan at low rates, that is not correct. Liquid funds only are counted. That means non-retirement accounts (no 401ks, IRAs, etc.). In the closing process, you also cannot simply move your money from retirement to non-retirement. This must be done at least 60 days prior to requesting financing, otherwise it will not pass underwriting.
Will,
You're best option at this point is probably obtaining financing from a portfolio lender, because they do not have to abide by all the requirements for Fannie Mae products. That's because they are servicing your loan themselves. But because Fannie Mae is not involved, they are taking on greater risk, so your terms will not be as attractive (higher rates, possible shorter term, higher % down).
Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
10y
This is directly from the most recent sellers guide 7/26/2016 Page 433 of 1379
Acceptable Sources of Reserves Examples of liquid financial assets that can be used for reserves include readily available funds in • checking or savings accounts; • investments in stocks, bonds, mutual funds, certificates of deposit, money market funds, and trust accounts; • the amount vested in a retirement savings account; and • the cash value of a vested life insurance policy.
Unacceptable Sources of Reserves The following cannot be counted as part of the borrower’s reserves: • funds that have not been vested; • funds that cannot be withdrawn under circumstances other than the account owner’s retirement, employment termination, or death; • stock held in an unlisted corporation; • non-vested stock options and non-vested restricted stock; • personal unsecured loans; • interested party contributions (IPCs) (see B3-4.1-02, Interested Party Contributions (IPCs)); and • cash proceeds from a cash-out refinance transaction on the subject property.
Sounds like a Fannie Mae loan...and that's were you'll be able to get the lowest interest rates (now 4-5%) available. And if it is a Fannie Mae loan, that's not correct. They have new requirements. They will ONLY count liquid funds.
All other lenders (portfolio lenders, securitized lenders, etc.) will only have loans available at 6% and up, most of which will require at least 25% down...many 50% down.
Just to be more detailed if you have a 401k which I consider a retirement account the funds in the 401K can be used for reserves. If it's a retirement account that you can't pull money out of until you're retired or over 55 then you can't use that as reserves.
Some people move their retirement funds into stocks, bonds mutual funds etc. It's still their retirement but it's now liquid and can be used for reserves.
I should have asked what type of retirement account you're using be saying 100% acceptable.
Shaun,
With all lenders I've worked with in the last year, if you're trying to obtain a Fannie Mae loan at low rates, that is not correct. Liquid funds only are counted. That means non-retirement accounts (no 401ks, IRAs, etc.). In the closing process, you also cannot simply move your money from retirement to non-retirement. This must be done at least 60 days prior to requesting financing, otherwise it will not pass underwriting.
Jon,
You're 100% wrong with 401K, IRA's etc. They can be used for reserves as I have done 100's of loans using 401K and IRA's for reserves. I know that for sure. And these were conventional, FHA, VA and USDA loans
The lenders that you have used this year have OVERLAYS with 401K and IRA's.
Sounds like a Fannie Mae loan...and that's were you'll be able to get the lowest interest rates (now 4-5%) available. And if it is a Fannie Mae loan, that's not correct. They have new requirements. They will ONLY count liquid funds.
All other lenders (portfolio lenders, securitized lenders, etc.) will only have loans available at 6% and up, most of which will require at least 25% down...many 50% down.
Just to be more detailed if you have a 401k which I consider a retirement account the funds in the 401K can be used for reserves. If it's a retirement account that you can't pull money out of until you're retired or over 55 then you can't use that as reserves.
Some people move their retirement funds into stocks, bonds mutual funds etc. It's still their retirement but it's now liquid and can be used for reserves.
I should have asked what type of retirement account you're using be saying 100% acceptable.
Shaun,
With all lenders I've worked with in the last year, if you're trying to obtain a Fannie Mae loan at low rates, that is not correct. Liquid funds only are counted. That means non-retirement accounts (no 401ks, IRAs, etc.). In the closing process, you also cannot simply move your money from retirement to non-retirement. This must be done at least 60 days prior to requesting financing, otherwise it will not pass underwriting.
Jon,
You're 100% wrong with 401K, IRA's etc. They can be used for reserves as I have done 100's of loans using 401K and IRA's for reserves. I know that for sure. And these were conventional, FHA, VA and USDA loans
The lenders that you have used this year have OVERLAYS with 401K and IRA's.
Well, that wasn't the case with the last 5 lenders I obtained financing with in the last year. All of which mentioned this was a new requirement and the retirement funds could not be counted unless somehow proven highly liquid.
Will i'm sorry to go off thread a little bit here, but I feel its important. Levi mentioned commercial lending as good financing for the "Long Haulers" I agree here and here's why. The average turn over for most real estate is 7 years. I seek commercial loans that have a 10 year life. In 10 years many things can change. For one there may be an increase in property value. At some point prior to the loan becoming due you can decide to sell and 1031 exchange or pay the property off or whatever. At this point you will have some pay down as well (most are 25 year amortizations). You can refi and take some leverage or just pull out the purchased equity and leave the appreciation. You can take it all if you want. It gives you options, and we all want options. you already have the lender, and yes there is a fee with the refi and I can't speak to weather or not its cheaper than just getting a new loan.
Since the commercial loan is based more on property performance there is more people looking at your numbers. There is some security there too. They are at least agreeing with you that you stand a chance at not loosing your shirt in the foreseeable future.
Other advantages include: They will loan to your LLC. what happens when you have 10 conventional loans and decide its time for an LLC? Commercial lenders usually do not care how many loans you have, and your DTI is less important here. I do multi family and do not need to live in the property for one year. No back up funds required.
I do realize that you want to get all your money back and reinvest in another flip. The trouble is there IMHO is less stability in doing that 100% of the time. doing that for a while then backing off maybe okay. Maybe I'm too conservative here. If you keep building and have say 3 flips a year going and rents fall then all three of your current flips are in trouble, as well as the three you did last year and financed at full FMV. and maybe farther back than that, because they are mortgaged to the max and the now falling rent won't support the high payments. If you used loans requiring a little higher down payment, as well as having a shorter amortization schedule you have a higher equity and pay down has been higher. If you can refi these without leverage they may stand a better chance of producing CF at a lower rent.
To me when you are starting out you are making a foundation. It needs to be strong, while at the same time you need to have every penny to invest. Its a pretty thin line to walk. When you are starting out in real estate there is a fine line between creating stability and getting every available penny out to reinvest. At some point using low interest longer term loans with lower pay down, and full leverage is going to get you in trouble. Its kinda like investing all your money in one stock. when it falls you are SOL. If you buy right and the first years rent will support the higher payment due to the shorter term there is a little more security IMHO.
As a buy and hold investor I don't ever want to own a property. I want to have some leverage against it and that means im going to be refinancing or selling every so often. My commercial loans are running 4.65 percent now. I don't know how that stacks to a conventional loan but if I sell in 10 years I think the difference in interest between weather I had a conventional or a commercial loan is small.
Just for the record I went to commercial loans after 4 conventional loans. I am now re-financing the first rental property with a commercial loan. While I could leverage this one and get a lot of money back I am not as I see a little bit of a correction coming in that particular city. If it doesn't correct in a year or 2 and the market continues to raise maybe I will sell and do a 1031 and try to increase from a duplex to a 4 plex. or maybe I'll refinance and get all my money, plus appreciation and the rest of my profile will be able to carry that one if rents fall. Who knows but I will have 10 years to decide. RR
Sounds like a Fannie Mae loan...and that's were you'll be able to get the lowest interest rates (now 4-5%) available. And if it is a Fannie Mae loan, that's not correct. They have new requirements. They will ONLY count liquid funds.
All other lenders (portfolio lenders, securitized lenders, etc.) will only have loans available at 6% and up, most of which will require at least 25% down...many 50% down.
Just to be more detailed if you have a 401k which I consider a retirement account the funds in the 401K can be used for reserves. If it's a retirement account that you can't pull money out of until you're retired or over 55 then you can't use that as reserves.
Some people move their retirement funds into stocks, bonds mutual funds etc. It's still their retirement but it's now liquid and can be used for reserves.
I should have asked what type of retirement account you're using be saying 100% acceptable.
Shaun,
With all lenders I've worked with in the last year, if you're trying to obtain a Fannie Mae loan at low rates, that is not correct. Liquid funds only are counted. That means non-retirement accounts (no 401ks, IRAs, etc.). In the closing process, you also cannot simply move your money from retirement to non-retirement. This must be done at least 60 days prior to requesting financing, otherwise it will not pass underwriting.
Jon,
You're 100% wrong with 401K, IRA's etc. They can be used for reserves as I have done 100's of loans using 401K and IRA's for reserves. I know that for sure. And these were conventional, FHA, VA and USDA loans
The lenders that you have used this year have OVERLAYS with 401K and IRA's.
Well, that wasn't the case with the last 5 lenders I obtained financing with in the last year. All of which mentioned this was a new requirement and the retirement funds could not be counted unless somehow proven highly liquid.
Most lender have OVERLAYS so sometimes it's hard to know what Fannie Freddie will actually accept. 401k's are liquid as you can borrower from it. Great discussion and this is why I love BP. Like minded people trying to help each other!
Sounds like a Fannie Mae loan...and that's were you'll be able to get the lowest interest rates (now 4-5%) available. And if it is a Fannie Mae loan, that's not correct. They have new requirements. They will ONLY count liquid funds.
All other lenders (portfolio lenders, securitized lenders, etc.) will only have loans available at 6% and up, most of which will require at least 25% down...many 50% down.
Just to be more detailed if you have a 401k which I consider a retirement account the funds in the 401K can be used for reserves. If it's a retirement account that you can't pull money out of until you're retired or over 55 then you can't use that as reserves.
Some people move their retirement funds into stocks, bonds mutual funds etc. It's still their retirement but it's now liquid and can be used for reserves.
I should have asked what type of retirement account you're using be saying 100% acceptable.
Shaun,
With all lenders I've worked with in the last year, if you're trying to obtain a Fannie Mae loan at low rates, that is not correct. Liquid funds only are counted. That means non-retirement accounts (no 401ks, IRAs, etc.). In the closing process, you also cannot simply move your money from retirement to non-retirement. This must be done at least 60 days prior to requesting financing, otherwise it will not pass underwriting.
Jon,
You're 100% wrong with 401K, IRA's etc. They can be used for reserves as I have done 100's of loans using 401K and IRA's for reserves. I know that for sure. And these were conventional, FHA, VA and USDA loans
The lenders that you have used this year have OVERLAYS with 401K and IRA's.
Well, that wasn't the case with the last 5 lenders I obtained financing with in the last year. All of which mentioned this was a new requirement and the retirement funds could not be counted unless somehow proven highly liquid.
Most lender have OVERLAYS so sometimes it's hard to know what Fannie Freddie will actually accept. 401k's are liquid as you can borrower from it. Great discussion and this is why I love BP. Like minded people trying to help each other!
Yes, I guess lenders don't always explain the nuances and regulations that have been developed since 2008. Every year the regulatory burden gets worse and the stack of docs the lenders require grows higher. All the more reason to go commercial.
Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
10y
This is also from the sellers guide and is relevant to the reserves discussion. This will help investors calculate reserves better. Also this rule just came into play last month so update notes everyone.
Pages 434 - 436 of 1379 in the Sellers Guide 7/26/2016
Calculation of Reserves for Multiple Financed Properties If the borrower owns other financed properties (determined in accordance with B2-2-03, Multiple Financed Properties for the Same Borrower), additional reserves must be calculated and documented for financed properties other than the subject property and the borrower’s principal residence. The other financed properties reserves amount must be determined by applying a specific percentage to the aggregate of the outstanding unpaid principal balance (UPB) for mortgages and HELOCs on these other financed properties. The percentages are based on the number of financed properties: • 2% of the aggregate UPB if the borrower has one to four financed properties, • 4% of the aggregate UPB if the borrower has five to six financed properties, or • 6% of the aggregate UPB if the borrower has seven to ten financed properties (DU only).
This is with Fannie only not Freddie. It's now easier because the old rule was 6 months of reserves for each financed investment home.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
10y
@Shaun Weekes can meet the reserves under these new standards?? Another plus is that as you pay your loans down the reserve requirement falls off as well.
@Shaun Weekes Soooo if I am reading this correctly this Greatly reduces the amount of reserves required does it not?? For example under the old method a $100,000 loan would need 6 months reserves and the P&I payment at 4% is about $477. That's $2862. Under the new method it would only be 2% or $2000 dollars correct?? perhaps @Will Pritchett can meet the reserves under these new standards?? Another plus is that as you pay your loans down the reserve requirement falls off as well.