Rental Property Investor · Philadelphia, PA · Member since 2015 · 213 posts · 160 votes
Hey BP,
Will any banks or CUs give a loan based on value rather than purchase price? I may be able to acquire a property below market that I plan to house-hack and was wondering they'd lend on value? That was I'm cashing out before even putting money in?
Or do I have to do a regular loan and then wait 6 months/1 year to refinance and then pull equity out?
The only way we've managed that with a residential (1-4 unit) property is to buy it cash and then refinance. If you are financing at time of purchase, lenders tend to underwrite to the lower of the appraised value or the purchase price (They like it when there is built-in equity).
Here in Canada, if there is a lot of baked-in equity that we want to access, and we must Close with financing, we have the option to choose an "open mortgage" (as opposed to "closed") where there are no penalties for retiring the loan early. Then, in 45 - 60 days, we'd refinance the property (we do not have a hard-n-fast seasoning period).
I've seen a few deals done that way, but mostly as a cash-out refi using a commercial loan after the borrower had already acquired the property using another source of financing or cash (even though no improvements were made to warrant the increased loan amount).
Grand Rapids, MI · Member since 2014 · 75 posts · 19 votes
8y
Realized I was typing my thought process and not the direct answer to the question. I haven't seen a direct acquisition loan structured based on the value.
The only way we've managed that with a residential (1-4 unit) property is to buy it cash and then refinance. If you are financing at time of purchase, lenders tend to underwrite to the lower of the appraised value or the purchase price (They like it when there is built-in equity).
Here in Canada, if there is a lot of baked-in equity that we want to access, and we must Close with financing, we have the option to choose an "open mortgage" (as opposed to "closed") where there are no penalties for retiring the loan early. Then, in 45 - 60 days, we'd refinance the property (we do not have a hard-n-fast seasoning period).
If you qualify and can wait the 6 months, the pricing will be much better. There are lenders and brokers out there that will do the loan as a commercial loan without income verification or seasoning, but the rates and fees are much higher.
Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
8y
I don't have a source to back this up other than the conversations I've had over the years... but lenders want you to have some skin in the game. I guess post economic downturn it's extremely unlikely ( read that as impossible)you're going to get a loan and cash back up front on a property you don't own.
Also, don't forget that when you do a cash out refi you're paying closing costs again.... and it's off appraised value which can differ from market value.
Rental Property Investor · Philadelphia, PA · Member since 2015 · 213 posts · 160 votes
8y
@Stephanie P. Is the seasoning period typically 6 months? I've heard it can be one year, but I guess that's bank dependent
@Matt K. thanks for the input, I plan utilize a low money down loan (3.5% or 5%) , which will have PMI, so paying those closing costs again will be annoying, but ultimately should save money in the long run.
Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
8y
I didn't do the low money down route so I don't know the specifics... but aren't there a few options with PMI? Like one way it's baked in for x amount of time, other way you can get it knocked off faster w/ an appraisal?
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
8y
Charles Kennedy I don’t know if there is an exact seasoning period. I’d imagine it’s either 6 or 13 months unless you bought all-cash. But in the latter scenario it’s basically delayed financing. That said, you’re positing a slightly different question than a topic that comes up a ton: “If I find a great deal will a bank financing 100% of the purchase price?” The no-money buyer finds a deal at 70% of what they think it will appraise for and want to do an 80/20 mortgage so there’s none of their own money in the deal and they can pull a few dollars out. Maybe there are some techniques there but every lender I’ve ever talked to wants me to have skin (read: money) in the game.
Rental Property Investor · Philadelphia, PA · Member since 2015 · 213 posts · 160 votes
8y
@Matt K. getting it knocked off w/ an appraisal and not having to refi out would be nice. I don't imagine I'd have much more equity above 20% so eliminating PMI is my main concern. Perhaps they may even rule it out day 1 if the appraisal comes in high enough. Discussions I'll have to have.
Rental Property Investor · Philadelphia, PA · Member since 2015 · 213 posts · 160 votes
8y
@Andrew Johnson I figured this would be the case... Thanks Andrew. Based on Matt chiming in, I think my best scenario is having a discussion with my lender on if PMI can be reduced or eliminated based on what the appraised value comes in at.
Real Estate Broker · Bradenton, FL · Member since 2017 · 544 posts · 363 votes
8y
I got a great deal on a house and closed with cash. then I was able to close a HELOC, for the full amount I paid, a few days later. Something like that might be possible with a normal mortgage refi?
I think the key is getting it to look like a refinance to the bank.
I am in a similar situation in which I purchased a triplex through my LLC and am planning to commercial refinance within 90 days. All the lenders I have spoken with will only do the lower of the appraisal or purchase price. I used a hard money loan to purchase and thought they would see it as a cash purchase but so far no luck. As previous comments have said, they want me to have skin in the game.
Will any banks or CUs give a loan based on value rather than purchase price? I may be able to acquire a property below market that I plan to house-hack and was wondering they'd lend on value? That was I'm cashing out before even putting money in?
Or do I have to do a regular loan and then wait 6 months/1 year to refinance and then pull equity out?
6 months is the rule. Past that is a lender overlay.
If you go FHA and house hack, you'll have upfront MI and monthly MI to worry about. Not heinous, but just factor it in.
If you're going conventional, you could do monthly MI that's baked into the rate, but your rate would be higher. Some take that route if they want a little more of an interest deduction and plan to be out of the house before they can get rid of the MI because the property appreciated.
You can't take cash out at the purchase if the appraised value comes in higher than the purchase price.
Real Estate Broker · Bradenton, FL · Member since 2017 · 544 posts · 363 votes
8y
@Charles Kennedy If you're really getting good equity when you purchase, you might be able to get a HELOC for that equity. I've heard some lenders will even do 100% HELOCs.
So lets say you buy a house for 80k thats worth 100k. You put 3% down for an FHA loan (2.4K). In theory you may be able to get a HELOC for 20k within a few months of purchase.
I'm not a mortgage expert, but I know people who have done this exact thing. It will definitely take some calling around to find 100% HELOC, but I know they're out there. You should at least be able to find one for 90%.
@Benjamin Kelly hmmm there has to be some lenders that will let you cash out or else the BRRRR method would be a myth...
@Rob Drum Unfortunately not in a position to purchase anything with all cash.
The BRRRR method is possible but there were two issues with it working in my case. The lender would do a cash out refinance on appraised value if (1) there major improvements done to increase property value, or (2) if it was bought with cash. I thought a hard money was seen as a cash purchase but so far I have not had any luck with a lender seeing it as such. I know the BRRRR method is out there...just trying to catch it.
@Benjamin Kelly hmmm there has to be some lenders that will let you cash out or else the BRRRR method would be a myth...
@Rob Drum Unfortunately not in a position to purchase anything with all cash.
The BRRRR method is possible but there were two issues with it working in my case. The lender would do a cash out refinance on appraised value if (1) there major improvements done to increase property value, or (2) if it was bought with cash. I thought a hard money was seen as a cash purchase but so far I have not had any luck with a lender seeing it as such. I know the BRRRR method is out there...just trying to catch it.
I don't use hard money so take this as will.... but when I was doing my research these loans will still get noticed when you get a new loan because you're submitting bank statements. They'll see the payments and even though it won't show on the credit report, they'll ask why/what for the payments.
The way around this is like mentioned you use a HELOC to purchase the house cash, then you can do refi to get the money back out. Not exactly how/why this is different than a HML when it comes to lenders, maybe someone else will chime in.
Also, no clue how it works/relates to commercial as I don't go that route either...
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
8y
@Benjamin Kelly When I did my cash-out refinance I was basically up front with my lender during the process. I didn't buy first and then talk to them about it afterwards. I just had the cash and wanted to use it as leverage in the negotiation. The owner wanted to get a deal done (because a partner passed away) in the (then) current calendar year. So I was talking to the lender about "can I do this" and there were a couple of stipulations (like 60/40 LTV) which I didn't care about but I didn't have to deal with any seasoning period. If (for this lender) I had wanted 80/20 or 75/25 there would have been a seasoning period. I also wanted to lock-in the rate before the fed rate hike (at the time) and didn't need the cash so I basically proceeded the way that I did. Anyway, I don't know if that "story" helps at all but it's the route that I went.
Investor · Bonita Springs, FL · Member since 2015 · 54 posts · 12 votes
8y
@Andrew Johnson Thanks for the reply and your story definitely helps. I went into the deal knowing that the lender would only do the lower of the appraisal/purchase price. I had initially shopped around for a lender who would do a cash-out refi with no seasoning based on appraised value but had no luck since it was not a cash purchase. The deal on the property was too good to pass so I went ahead anyway. Since the property is fairly cheap, it really did not hurt me too much to have cash stuck in it but it would be ideal to have a clean exit.
Investor · Bonita Springs, FL · Member since 2015 · 54 posts · 12 votes
8y
@Matt K. Thanks for the tip! That does make sense and I will definitely take that knowledge moving forward. I do not have access to a HELOC at the moment but by the end of this year I should have enough cash-flow to self sustain and then I can do the cash up front. Thanks.
Rental Property Investor · San Antonio, TX · Member since 2011 · 512 posts · 290 votes
8y
The statement above that says "banks lend on appraisal, that's it" is incorrect in my experience. When refinancing a rehabbed property we were given 75 percent of the new appraised value, or the purchase price; whichever was lower. After six months seasoning loan was based on 75 percent of appraisal. We are currently in the midst of one of these.
Going commercial, the first loan product presented to us was based on cost plus improvements at 75 percent of the total. This again, is not based on appraisal.
I am curious what terms people have received on "delayed financing" if purchasing with cash. If I had known this detail before my last purchase, I would have not put a lien on the property at all. Our lender mislead us along the way stating that there would be no seasoning. I asked her again and again and she insisted that there would be no seasoning. Come closing week, she announces that we hadn't seasoned it long enough. Go figure. Lesson learned: most lenders don't understand investor loans. This is my second experience like this. I would advise finding someone that knows all the strange nuances of lending to investors with conventional loans.