Cashout ReFi options for 1st flip that is not selling

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Cashout ReFi options for 1st flip that is not selling

Sean Youngberg
Investor · Maryville, TN · Member since 2016 · 13 posts · 4 votes

I'm having quite the learning experience on my first "deal". Purchased an old SFH REO for rehab and flip. I used a portfolio lender that provided a "construction" loan with interest-only during the rehab which has now converted to a 3-year note with balloon.

The rehab ended up going way over budget, and over the amount of the construction loan. Most of this overage I'm now carrying on credit cards. I had a lot of the credit card debt on 0% promo rates which are now rolling off.

House is finished now and on the market, but its not getting a lot of traction for the current asking price.  What I want to do at this point is leverage the equity of the investment property to pay off my credit card debt. I've now accepted that I may need to hold this property for several months before finding the right buyer. Also starting to explore the market to rent the property instead. In either case, I need to get some cash out to pay off the cards.

Existing Commercial Note $148K

Estimated Value $260-270K

I would like to Cash out ReFi to around $210K or around 80% LTV. I thought this would be easy enough to convert to a conventional mortgage as my W2 income should be enough to qualify for that. But my portfolio lender is saying no-go on the conventional since it is an investment property. They are willing to work with me if I rent it and start generating some revenue from the property. I'm going to have another chat Monday to see about options, but was hoping the BP community could offer some advice.

The other crummy thing is my credit score is in the dumps due to the card utilization. My DTI with the current CC payments is at 44%. My wife's DTI much less.

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Jeff Dulla
Lender · Western Springs, IL · Member since 2015 · 472 posts · 245 votes
8y

@Sean Youngberg The issue is that people, especially on here, generalize with terms like portfolio and don't fully understand what that means. Like portfolio is a magic term for doing anything Fannie/Freddie doesn't. Most portfolio loans that I know/use, mimic many of the underwriting guidelines that Fannie/Freddie follow. To a T. The lack of ability to sell a loan takes away a great deal of risk mitigation. So I wouldn't assume that they automatically go to a higher loan to value. 

Almost every portfolio  lender I know of will have the same guides unless you are going with a commercial loan or Non-Prime loan. And you would certainly know that because the loan structure and rates would be much different. 

I know many would not want to touch their primary residence but it comes down to cost of debt. If you have 10% you can tap in to (like you said above), maybe you cash out (depending on your current rate) or get a HELOC. That will help you get your loan to value down to 70% on the investment and should open many more avenues for you. A solid lender could do both in one fell swoop.

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  • Mike Ventura
    Columbia, NJ · Member since 2015 · 47 posts · 20 votes
    8y
    Sean Youngberg is the portfolio lender saying no go because the original loan is not seasoned, because of your desired LTV, or because it actually can’t be done? I refinanced a BRRRR last month. Refinanced out of my loan with PNC Bank through AIMLoan. Very easy process. Not sure what the process would be like for a portfolio lender...
    0Reply
  • Sean Youngberg
    OP
    Investor · Maryville, TN · Member since 2016 · 13 posts · 4 votes
    8y

    They didn't say no-go entirely, but ReFi to a "conventional" mortgage was a no-go since this is an investment property. Here is the quote:

    Conventional mortgages are not for investment properties, they are for primary residences. So a 30 year option the property is out, unless it becomes your primary residence. You probably do qualify on your income alone in increasing the debt on the property, but it is not a slam dunk if it is not generating income.

    I think that is part of what is confusing me, as I read about people getting up to 4 conventional loans pretty easily just based on Income / DTI. But I suppose since they are a portfolio lender, conventional loan is not the same thing?

    I'm worried about being able to qualify now since my DTI and credit score are all out of wack due to the debt (which the loan would fix).

    Side Note: Why do I have such a hard time tagging @someone here. Is there a trick to it?

    0Reply
  • Jeff Dulla
    Lender · Western Springs, IL · Member since 2015 · 472 posts · 245 votes
    8y

    @Sean Youngberg If you purchased the home more than six months ago, I don't think seasoning is the issue. My guess is that on SFH, investment, cash out, Fannie/Freddie caps you at 75% loan to value. 70% on a MFH. So the LTV is probably an issue.

    Do you have a decent equity position in your current home or any other properties?

    0Reply
  • Sean Youngberg
    OP
    Investor · Maryville, TN · Member since 2016 · 13 posts · 4 votes
    8y

    @Jeff Dulla Since it is a portfolio lender, would they be selling "conventional" mortgages to fannie/freddie?

    I do have about 70% equity stake in my primary residence.

    0Reply
  • Jeff Dulla
    Lender · Western Springs, IL · Member since 2015 · 472 posts · 245 votes
    8y

    @Sean Youngberg The issue is that people, especially on here, generalize with terms like portfolio and don't fully understand what that means. Like portfolio is a magic term for doing anything Fannie/Freddie doesn't. Most portfolio loans that I know/use, mimic many of the underwriting guidelines that Fannie/Freddie follow. To a T. The lack of ability to sell a loan takes away a great deal of risk mitigation. So I wouldn't assume that they automatically go to a higher loan to value. 

    Almost every portfolio  lender I know of will have the same guides unless you are going with a commercial loan or Non-Prime loan. And you would certainly know that because the loan structure and rates would be much different. 

    I know many would not want to touch their primary residence but it comes down to cost of debt. If you have 10% you can tap in to (like you said above), maybe you cash out (depending on your current rate) or get a HELOC. That will help you get your loan to value down to 70% on the investment and should open many more avenues for you. A solid lender could do both in one fell swoop.

    1Reply
  • Sean Youngberg
    OP
    Investor · Maryville, TN · Member since 2016 · 13 posts · 4 votes
    8y

    @Jeff Dulla

    That is interesting information, thanks. What are you thoughts on this response from the lender: 

    Conventional mortgages are not for investment properties, they are for primary residences. So a 30 year option the property is out, unless it becomes your primary residence. You probably do qualify on your income alone in increasing the debt on the property, but it is not a slam dunk if it is not generating income.

    It sounds like they are only willing to continue it as a commercial loan since it is an investment property. I suppose that would be fine, but I'm not sure I want to turn it into a rental yet, so would rather try to qualify based on "conventional" terms (ability to repay, etc).

    1Reply
  • Jeff Dulla
    Lender · Western Springs, IL · Member since 2015 · 472 posts · 245 votes
    8y

    @Sean Youngberg I think that response is a load of BS. Fannie/Freddie offer programs for primary, second home and investment routinely. That’s part of every day business. I do Loans for investment properties monthly. Through Fannie/Freddie.

    It sounds like they want to steer you commercial. My guess is that it's a short term ARM/balloon? Something fixed for 1 to 3 years and you have to redo down the road correct?

    1Reply
  • Jefferson Smith
    Portland, OR · Member since 2017 · 107 posts · 27 votes
    8y

    I have essentially the same question as @Sean Youngberg. I bought a property with cash, it is fully rented, and I was told by a lender that I could only get a 5-year ARM (amortized over 30), but could not get a mortgage with a longer fixed term since I don't live there. Are there banks that will provide a 15+ fixed term mortgage for rental properties? (Anyone on BP who we oughtta tag and ask?)

    0Reply
  • JingJing He
    Hayward, CA · Member since 2017 · 91 posts · 40 votes
    8y
    That’s interesting! I suggest go shop around for a loan to refi yourself out of your current one if possible. I don’t know all of your back end stories, but I had personally did conventional 30 year on buying rentals and had refi on them too. Granted the interest would be like a 1% higher than owner occupied ones and demands a 25-35 percent down payment. What are you hoping for with rent and hold? Are the materials u use up for tenants wear and tears? I know sometime rehabs dont use materials that are suited for tenants. So keep that in mind as with tenants it may come with needs to fix things up when u want to sell again. You said that u had over extended with remodeling cost seems to me like you may have price the house too high? Sometimes it’s about cutting losses too. Or your market maybe slow during the winter season. With balloon payments coming on ur current note, you would need to either sell or refi? If you are just worried about ur credit card payments, you could always open other interest free ones to delay it(which I personally wouldn’t do). Have you thought of moving into this house to get yourself a refinance deal and rent out the house u live in now? Wishing you the best of lucks with this one.
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  • Heidi Wilson
    Charleston, SC · Member since 2017 · 84 posts · 46 votes
    8y
    I have done this 4 times and always do a commercial loan 15 year fixed with a balloon. Requires 20% down and the interest is a bit higher than my personal mortgage but if your house isn’t a million dollar house (which mine aren’t) it shouldn’t break the bank. There are also no limits with the number of properties you can finance this way (at least that’s my understanding).
    0Reply
  • Heidi Wilson
    Charleston, SC · Member since 2017 · 84 posts · 46 votes
    8y
    Jefferson Smith I just used my local bank’s commercial lending department. I like using my local bank because they know the area and are more responsive and “get” what I do. As I said in my post above my mortgages are 15 year fixed 5 year term with a balloon. But my mortgages are not huge so paying them off is feasible and the mortgage payments fit well into my financial model and allow the rentals to be profitable.
    0Reply
  • Jefferson Smith
    Portland, OR · Member since 2017 · 107 posts · 27 votes
    8y

    @Heidi Wilson thanks. So you're saying you got a 5-year fixed, then transitioning to an ARM, amortized over 15 years?

    That is similar to what I’ve been offered. My hope was/is to find a 15-20+ year fully fixed, but that might be a chimera if I’m not living there. 

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  • Heidi Wilson
    Charleston, SC · Member since 2017 · 84 posts · 46 votes
    8y
    I actually have to refi or pay in full at the end of five years. It’s only a 5 year term.
    0Reply
  • Heidi Wilson
    Charleston, SC · Member since 2017 · 84 posts · 46 votes
    8y
    But the interest is fixed for the term of the loan.
    0Reply
  • Jeff Dulla
    Lender · Western Springs, IL · Member since 2015 · 472 posts · 245 votes
    8y

    @Jefferson Smith This is a single family, condo or 2 - 4 unit residential home and you are only being offered commercial products?

    Unless there is a major piece of information I am missing, you should be able to get whatever conforming, fannie/freddie loan product on this - 15 Year Fixed, 30 Year Fixed, etc. 

    1Reply
  • Jill F.
    Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
    8y

    @Sean Youngberg When you start typing the @user_name you have to use your mouse (or touchpad) and hover over the name box when it appears and the DOUBLE CLICK to select the user. I am not a windows user so I was unaccustomed to double clicking to select and it took me forever to figure that out.

    0Reply
  • Harjeet BhattiPro Member
    Lender · Glenview IL- CDLP NMLS#230554 · Member since 2015 · 2k+ posts · 747 votes
    8y

    620 FICO is minimum requirement for purchase or refinance of  residential or investment property. Conventional loan lender do not lend on short term basis nor they will lend if property is on sale. You need 6 month seasoning if the property has any kind of loan on it to cash out. 75% max cash out on 1 unit and 70% on 2-4 units under conventional loan.

    If you have short term goal for this cash out take out HELOC on this property.

    1Reply
  • Jefferson Smith
    Portland, OR · Member since 2017 · 107 posts · 27 votes
    8y

     @jeff dulla

    Thanks so much for the reply. 

    It’s a Fourplex. I’ve owned it since summer. 

    I own it free and clear, bought for cash. It is fully rented. I don’t live there. My credit is about 780. 

    Would like a 15 to 30 year fixed for a cash out, if that is available. Over the holidays haven’t been able to talk to a lot of lenders (just 2 so far: 1 telling me the 5-year fixed terms, and another to set an appointment). 

    0Reply
  • Harjeet BhattiPro Member
    Lender · Glenview IL- CDLP NMLS#230554 · Member since 2015 · 2k+ posts · 747 votes
    8y

    @Jefferson Smith Yes, you can cash out any time under delayed financing exception, no seasoning required in your loan scenario. Any lender will be able to offer you.

    1Reply
  • Jefferson Smith
    Portland, OR · Member since 2017 · 107 posts · 27 votes
    8y

    @Heidi Wilson Thanks for that reply. @Sean Youngberg Thanks for letting me piggyback on this related thread. If it gets out of hand, I’m happy to start anew. 

    @Harjeet Bhatti Thanks so much for your reply. So I should be looking for a residential lender / mortgage (without living there)? And you’re saying I can get a term fixed beyond 5 years? 

    0Reply
  • Harjeet BhattiPro Member
    Lender · Glenview IL- CDLP NMLS#230554 · Member since 2015 · 2k+ posts · 747 votes
    8y

    @Jefferson Smith MB can also help in this transaction or any other lender locally in your area. Mostly lender can offer you 30,20,15 year fix or arm also.

    0Reply
  • Thomas Fortune
    Investor · Virginia Beach, VA · Member since 2013 · 84 posts · 26 votes
    8y

    @Sean Youngberg - if you share some details around the property itself, there may be some help/insight on offer on how to get the house sold. I'm not saying don't pursue the cash-out, but the best solution to your problem is selling. 

    How realistic is your asking price? Is the house staged? Professional photos? Correct agent commission for the selling agent? 

    0Reply
  • Stephanie MedellinBusiness Member
    Mortgage Broker · CA · Member since 2014 · 1k+ posts · 642 votes
    8y

    @Sean Youngberg  It's almost unbelievable that they would tell you that you can't get a conventional loan because it's an investment property.  Of course you can get a conventional loan for an investment property!  That's ridiculous!

    You will be limited to 75% LTV on an SFR (not 80%), and should be able to count 75% of expected rental income. Also if you're paying off other debt through the loan, that monthly payment can be excluded from your DTI calculations.

    You will have to take the house off the market though, as you won't be able to refinance a property currently for sale.  Some lenders may or may not have overlays on this requiring the property to be off the market for a certain amount of time, but current Fannie Mae guidelines just say that the property has to be taken off the market before the disbursement date of the new loan.

    If you truly intend to sell the property after closing on the loan, it would be nice of you to inform your loan officer.  It's very possible that they could be required to return any compensation made on your loan if it's paid off within a certain amount of time, which can be avoided if the loan is structured differently. 

    Good luck to you on this one - it's a tough situation to be in.  One thing to consider - if the property is not selling at the price you're asking, it is unlikely the property will appraise for that price when trying to refinance.  If the value is not there, you may have a difficult time refinancing for the amount you need to pay off all the debt incurred from the project.  Hopefully that's not the case, but something to be aware of.

    [email protected]
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  • Benjamin Burket
    Realtor · Canandaigua (Rochester area), NY · Member since 2016 · 87 posts · 37 votes
    8y

    @Sean Youngberg I think the best bet is to shop your situation around to as many local banks as you can.  You may get turned down by a few, but don't let the "no"s stop you from asking.  Chances are there's a great lender out there that would be willing to work with you, but they aren't going to come find you :)

    0Reply
  • Ola Dantis
    Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
    8y

    @Sean Youngberg Congratulations on your first deal (many never do their first deal). Though I know that this isn't going the way you'd like, it is imperative you celebrate that fact that you got started. 

    Now to the deal, from a selling the house perspective, I think you have a couple of options here: 

    1. Have you tried another exit strategy called a Lease Option? This doesn't immediately solve your liquidity issue, but since you have the 3-YR ballon you might be able to get a tenant in there at List Price. If the tenant buys in a year or so can pay off the existing commercial note. 
    2. Lowering the List Price (I know this is a basic one, but buying is emotional and a lower price could re-ignite interest).

    As for the loan, you should be able to find another lender who would be glad to REFi you out so far the property appraises at the 260-270k value. 

    Good thing is that this first deal has taught you a lot and your next deal would be way better :)

    Hope this helps. Goodluck. Thanks! - Ola 

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