Port Huron, MI · Member since 2018 · 37 posts · 3 votes
Hello everybody!
My Fiance and I were recently discussing possibly taking out a large personal loan to be able to purchase an investment property cash to try out the "BRRRR" strategy. We are just starting out so we don't have much capital and personal loans seem to be readily available and an easy way purchase with cash. I'm very aware that if I do this my credit score will tank due to the lopsided debt to income ratio. So my question is.. will that affect the odds of a successful cash out refi? I've heard from a few other people who used this strategy and it worked but I'm still a bit apprehensive..
Any thoughts will be greatly appreciated! Thank you
@Harjeet Bhatti so you think the bank wouldn't have a problem giving me a cash out refi loan as long as i specify that I will pay off the personal loan with it?
You'll possibly have to call around to a bunch of lenders, or use one of the national guys like Lima One who are used to working with investors. If you go with the strategy of using a personal loan for the purchase, than what you'll likely have to do is have the bank doing the cashout escrow the money and payoff the loans from the escrow account. If your credit score and DTI ration tank due to the loans, but they pull your full credit to see that you have solid history...than really their main concern is...if I give you this refinance are you really going to pay off that other debt or are you going to keep the money and blow it all on black at the roulette table in Atlantic City...so long as you can curb their fears that you aren't going to do this...than you have success.
Don't bother talking to Wells Fargo or Bank of America or any of the other big banks...you're going to be looking for smaller community or at best regional banks as well as credit unions who have more flexibility with regards to how they structure their loan terms.
My Fiance and I were recently discussing possibly taking out a large personal loan to be able to purchase an investment property cash to try out the "BRRRR" strategy. We are just starting out so we don't have much capital and personal loans seem to be readily available and an easy way purchase with cash. I'm very aware that if I do this my credit score will tank due to the lopsided debt to income ratio. So my question is.. will that affect the odds of a successful cash out refi? I've heard from a few other people who used this strategy and it worked but I'm still a bit apprehensive..
Any thoughts will be greatly appreciated! Thank you
Dennis
Hey Dennis
If your score drops and your debt ratio increases, it will absolutely crush the odds of a successful cash out refi and if the loan does go through, you'll pay higher interest.
Thanks @Stephanie P., maybe finding a private money lender would be better?
@harjeet bhatti is right. If you pay off the personal lines when you cash out, your debt ratio won't be affected (except your loan amount is higher).
What many people do is use hard money and then find a broker that will put you into a no income verification loan (so debt ratio is not an issue). You'll be capped at 70-75% loan to value, but cash out is not an issue, income is not an issue and as long as you have a 650+ credit score and pay mortgages on time, credit won't be an issue.
Port Huron, MI · Member since 2018 · 37 posts · 3 votes
8y
@Harjeet Bhatti so you think the bank wouldn't have a problem giving me a cash out refi loan as long as i specify that I will pay off the personal loan with it?
@Harjeet Bhatti so you think the bank wouldn't have a problem giving me a cash out refi loan as long as i specify that I will pay off the personal loan with it?
You'll possibly have to call around to a bunch of lenders, or use one of the national guys like Lima One who are used to working with investors. If you go with the strategy of using a personal loan for the purchase, than what you'll likely have to do is have the bank doing the cashout escrow the money and payoff the loans from the escrow account. If your credit score and DTI ration tank due to the loans, but they pull your full credit to see that you have solid history...than really their main concern is...if I give you this refinance are you really going to pay off that other debt or are you going to keep the money and blow it all on black at the roulette table in Atlantic City...so long as you can curb their fears that you aren't going to do this...than you have success.
Don't bother talking to Wells Fargo or Bank of America or any of the other big banks...you're going to be looking for smaller community or at best regional banks as well as credit unions who have more flexibility with regards to how they structure their loan terms.
Port Huron, MI · Member since 2018 · 37 posts · 3 votes
8y
@Harjeet Bhatti.. so yes my plan is to pay off the personal loan with the cash out but my concern is that the bank would deny a refi because of the personal loans effect on DTI before payoff..
Camano Island, WA · Member since 2017 · 91 posts · 42 votes
8y
Wouldn't they use the income from the rental as additional income? Or do they need to show the rental income for a certain amount of time before a lender will accept it as reliable income?
Port Huron, MI · Member since 2018 · 37 posts · 3 votes
8y
@Liz Cole I just spoke with a local lender who said you basically have to show rental income for two years in order for them to use it in their calculations.. they basically want to see it in your tax filings..
Port Huron, MI · Member since 2018 · 37 posts · 3 votes
8y
Thank you all for the input! At this point I think this strategy will work.. there’s just a little less wiggle room than I’d like but I’ll keep at it until I figure it out! Any other suggestions?
@Harjeet Bhatti so you think the bank wouldn't have a problem giving me a cash out refi loan as long as i specify that I will pay off the personal loan with it?
After 6 months, you can get cash out. Before 6 months from purchase, you'll be limited to the purchase price.
Port Huron, MI · Member since 2018 · 37 posts · 3 votes
8y
Thanks Stephanie, I kinda plan on structuring it so I can carry the loan for the 6 months and then cash out to pay the majority if not all debt incurred.. that way the cash flow will be all mine to reinvest..
Investor · River City, Manitoba · Member since 2017 · 162 posts · 193 votes
8y
Talk to a mortgage broker. I currently love a product up here in Canada by Scotia bank called "one step"
Let's say I purchase a property for 100K. With 20% down I will need a mortgage for 80K. I not only get approved for the initial 80K but they open up the mortgage and say that after an appraisal they will allow the mortgage to be for "X" amount.. for this scenario lets say it's up to 145K.
Buying the property I already need an appraiser to assess the property value. I talk with him/her and ask them after they have written up the appraisal, and say... okay so you say based on the condition and comps this property is worth 100K what in your opinion will I need to do to this property to get it to (x amount) usually equal to current purchase price plus budget plus a minimum of 25% more.
.
ie: purchase at 100K
20K down payment
80 K mortgage
Renovation cost of 15K
100 + 15 = 115 x 1.25 = 144K
This means I can now open up the back end of the mortgage product for the 144K and extract my full down payment and reno costs. I'm literally into the property for nothing, and as long as the rent is greater than the expenses it's cash flowing well in my opinion and worth it to do the work!
Port Huron, MI · Member since 2018 · 37 posts · 3 votes
8y
@Steve S. my problem is I don’t have the 20% down.. and they are very picky about where that 20% comes from.. it can’t be from another loan.. according to the people I’ve talked to anyways.. everything has to be documented down to last cent. The system you speak of sounds like a great strategy.. I just don’t have that initial down payment..
Investor · River City, Manitoba · Member since 2017 · 162 posts · 193 votes
8y
@Account Closed I apologize only by re-reading this thread did I understand the context. I would say you might be in a tough spot for a bit. Usually even to get a hard money loan they want you to have some skin in the game. So you're going to have to be creative to figure out how you can get that down payment. It may mean that you work with tighter margins and pay someone out who helps you with the financing.... I dunno.. but now at least you have the blue print I use for success.
Port Huron, MI · Member since 2018 · 37 posts · 3 votes
8y
@Steve S. no worries.. I’ll get there just gotta get creative like you said.. hopefully by this time next year I’ll be using your strategy! Thanks for the input.
Investor · River City, Manitoba · Member since 2017 · 162 posts · 193 votes
8y
@Account Closed you have a dangling participle as a question it's either makes no sense or leaves the reader to self interpret what you mean by the word "that"
Please understand my only reason for bringing this up is because I want to fully answer your question but I don't exactly understand what you're asking. Feel free to send me a message and I can walk you through the steps and answer any/all of your questions... As right now my answer would be " I use a calculator or do some quick mental math" but I don't think that's the answer you're looking for either.
@Liz Cole I just spoke with a local lender who said you basically have to show rental income for two years in order for them to use it in their calculations.. they basically want to see it in your tax filings..
Waiting 2 years is an overlay. You can use 75% of the market rents right away.
Burlington, KY · Member since 2013 · 58 posts · 65 votes
8y
I just refinanced my first brrrr and they had the appraiser do a market rent analysis to show the bank what this house should rent for. They then used 75 % of that to add to income.