How to Obtain a Mortgage on Recently Rehabbed property?

11 Replies

Hello All,

Scenario:

-I obtain a hard money financing for a property under contract.

-Example property X: paid $40k, rehab $20-25k, worth $105k

-Instead of flipping the property, I decide to keep the property as a rental

-Need to refinance the property out of the hard money loan.

Can I go to a bank, and obtain a mortgage for this property, without having to put a down payment due to large equity position? What is the best way to accomplish this? Will there be a lot of obstacles? PMI? What is the logical way to go about obtaining financing for this property as a rental going forward? I would assume a bank would check to see if any liens are on the property?

Thanks for the help!

Absolutely!!! This is a refi not a new home purchase. This is an example of how hard money lending can be favorable. Great Job!!!!

Let me back up. I assume you already have a primary residence with a mortgage? If this is the case you could potentially get hit with PMI, but definitely no down payment.

If the home is now worth $105k (and in fact appraises for that amount), you can do a cash-out refinance for 75% of that amount ($78,750). 

At the closing, the title company/attorney/closing agent will pay off your hard money loan and any other liens to ensure they have the first position note on the property. 

So if you have a hard money loan for $60k, you walk out of the closing with a check (or a wire) for $18,750, less closing costs and pro-rated interest payments.

There is generally no "down payment" on a refinance in the sense you're referring to. The 75% LTV takes care of that.

In other words, on a purchase, you'd need put 25% down on an investment property. Whereas, on a refi, you can take 75% out. Same numbers, but no cash out of pocket on a refi.

No PMI since you'd be at below 80% LTV.

Jeff Copeland, Broker in FL (#BK3326487)
727-235-7988

You can certainly cash out refi if there is enough equity. As previously mentioned, the highest LTV you'll get is 75%. Seasoning is a factor. There are some lenders who will lend off of full appraised value with only 1 month of seasoning, but LTV would only by 70%. To get to 75% you would need at least 6 months seasoning.

What about if my income would not support this second mortgage, hypothetically?  If you include the rental income it would in this instance, but what if I did not have any other proof of income?

There is Fannie mae Exception that applies to people who fund deal using cash or hard money and also want to do cash out refinance.

This topic is very new for me but heard about that in one of recent BP podcast.

You might want to do some research on that.

Depending on qualifications, you can refinance and pay off the hard money loan via a conventional fannie/freddie mortgage or rental financing from a private lender.  Your max leverage amount will most likely be 75% in either option.

Getting a conventional mortgage would be the cheapest route to go, but its also harder to qualify for from a credit and income perspective.  For an income analysis, all of your personal debts will be compared to the your reported income on tax returns.  If you don't show much income, or write off a lot of expenses, it could be difficult to qualify per the debt to income ratio requirements. In order to use rental income from a recently acquired investment property, you'll have to provide a copy of a lease and they'll use a percentage of the rental income to offset the mortgage, taxes, and insurance payments.  

Rental financing from a private lender is a little easier to qualify for from a credit and income perspective.  The rates will be a little higher and typically they have a 20-30yr amortization with a 3, 5, 7 or 10 year balloon.  Private lenders will not have as strict of a debt to income analysis, and will put a bigger emphasis on the cash flow of the property compared to the mortgage payment.  A lot of times, having some level of landlord experience is either required or a compensating factor for getting approved.  

Originally posted by @Nathan Trunfio :

Depending on qualifications, you can refinance and pay off the hard money loan via a conventional fannie/freddie mortgage or rental financing from a private lender.  Your max leverage amount will most likely be 75% in either option.

Getting a conventional mortgage would be the cheapest route to go, but its also harder to qualify for from a credit and income perspective.  For an income analysis, all of your personal debts will be compared to the your reported income on tax returns.  If you don't show much income, or write off a lot of expenses, it could be difficult to qualify per the debt to income ratio requirements. In order to use rental income from a recently acquired investment property, you'll have to provide a copy of a lease and they'll use a percentage of the rental income to offset the mortgage, taxes, and insurance payments.  

Rental financing from a private lender is a little easier to qualify for from a credit and income perspective.  The rates will be a little higher and typically they have a 20-30yr amortization with a 3, 5, 7 or 10 year balloon.  Private lenders will not have as strict of a debt to income analysis, and will put a bigger emphasis on the cash flow of the property compared to the mortgage payment.  A lot of times, having some level of landlord experience is either required or a compensating factor for getting approved.  

Thanks Nate,   what kind of rates would I be looking at for private rental funding? 

Hi Brent, it obviously will depend on qualifications and your preference for what length of Balloon term (based on your hold or exit strategy,) but most of these rates are between 5% to 9%.

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