Using brother's HELOC to buy a property in cash, then DFE REFI

9 Replies

Hey all,

I'm currently looking to purchase my first property OOS for 100-150k. The great deals that have been coming to me are getting swooped lightning fast, so I'm wondering if offering on all cash terms would help give me an edge. I have enough to secure a conventional mortgage with 20% down, but recently a family member took out a HELOC on their house and said I may use a portion of that to pay for a property in cash, then refi that property as soon as possible to pay him pack.

I'm relatively new to the real estate thing in general so apologize in advance for my ignorance, but I'd like to know:

-What are the potential complications I'd run into in this scenario? I'm sure there are a multitude I'm unaware of. 

-What dictates the percentage of the purchase price I'm allowed to pull out of the house immediately?  How likely would I be able to pull out 100% of the purchase price (or perhaps I should be asking 100% of the appraised value).  

-Am I getting into any other miscellaneous tax related implications by receiving 100-150k from someone else to buy the property?

Thanks in advance BP!

What can go wrong is that you may not be able to get the refinance loan later for various reasons.  Maybe something regarding the condition of the property itself, or a change in your finances, or various other random scenarios.  What if someone hacks your identity and lowers your credit score?  Not your fault at all, but maybe you won't be able to get a loan for a long time while you settle that matter.  So, if you can't get the refinance loan for whatever reason, maybe have a backup plan.  Contact an attorney and get all the agreement in writing, and any backup plan in writing, to reduce the risk of inter-family drama/lawsuits.

And I think you can only pull out 80% of appraised value on a refinance like this.  Although I'm not a loan officer, so I could be wrong about this.

I personally would never do this even if offered to me. HELOCs can be called by banks, you may not get a refinance in time, it could appraise low.

You want to buy an out of state rental with your brothers money as your first deal? I hope your brother has a lot of money In case you lose it all.

Where are you looking that these “deals” are getting bought up super fast ?

Even if everything works your, "technically" it not a cash purchase, since you are borrowing unsecured money from your brother. So you will have to wait for at least 6 months to do a cash-out refi.

@Alexander Jones This will come under personal loan so you will be able to cash out under delayed financing exception. You can cash out 70% of appraisal value or purchase price which ever is less. 

Another thing that could go wrong is you end up owning a property without sufficient operating capital. They say real estate is a great way to make a large fortune, but it takes a small fortune to get started. Especially when it's your first deal, out of state. You should expect to sink some extra dough in post sale. I'd be worried about cash reserves if an issue comes up before you can refinance. So it seems risky to me, but if you pull it off, hats off to you! Definitely some creative financing. 

Also it seems odd that you would need to make a cash offer. I can't imagine turnkey markets being cash-only markets, but I could be wrong, maybe you found a real honey hole. However if the "great deals" are coming to you from a turnkey provider, there's a possibility that TK provider is just using sales 101 and creating a false sense of urgency to speed up the sales cycle and close you. You probably already know this but if a TK provider or any realtor ever urges you to make quick decisions, use cash, not have a 3rd party inspection and walk the property yourself before purchase, then you should do some more research on who will be counting your money (or your brothers money). 

@Alexander Jones , you wrote: "How likely would I be able to pull out 100% of the purchase price (or perhaps I should be asking 100% of the appraised value)"? No, you should not be asking "100% of the appraised value"! [Lenders generally won't lend 100% LTV]. As to whether you can pull out 100% of the purchase price under Fannie's 'Delayed Financing Exception' rules, that would depend on how much of a discount you got in the first place. And if they're selling like hot cakes, then how good of a discount can you really be getting? My guess is: Next-to-none!

Upen will be right about you having to wait at least 6 months to refinance, if your brother puts a lien on the property until you pay him back. (Or, does he trust you that much?) Good luck...

Really appreciate the input from everyone, these are great things to consider. 

@Upen Patel @Brent Coombs I read that in mid 2011 Fannie Mae changed their delayed refi program so that that 6 month period is waived.  You can now refinance within 24 hours of purchasing.  

Digging a little bit deeper I came across two points that I think relate my situation:

  • If the home was bought using money from a home equity line of credit on another house, the money from the cash-out refinance must first be used to pay down the HELOC debt.
  • Gift funds used to buy the house cannot be paid back with the cash-out proceeds.

The second bullet point is interesting seeing as the funds from my brother would be classified as a gift, no?  I'm unfamiliar with the tax laws and classifications in this regard.  

I will probably end up just getting pre-approved and in order to move quicker on these deals, but it is an interesting discussion nonetheless! 

@Alexander Jones

Your brother can be a private lender. Make sure to record a deed in the county the property is in thus it becomes a mortgage. Then go to a bank and refi that mortgage . Make sure the lien is as close to 70% LTV of appraised value. The bank that refi's will see there is a lien and pay it off therefore your brother get paid back.

Jorge

@Alexander Jones , if you're borrowing money from your brother, then no, it is not a "gift". Your first bullet point would apply: "the home was bought using money from a home equity line of credit on another house". But, if your brother then puts a lien on it, then your DFE idea goes out the window. [Afaik, DFE was always to be conducted within 6 months, but only if there is no existing lien/mortgage on the property]. 

Harjeet mentioned "70%" LTV, but you may need to check with your loan officer about that. As of this month (May 2018) I couldn't find that specific percentage mentioned in relation to DFE*, even though I'm quite sure that "70%" was there previously. You can hope that Harjeet is correct about your brother's private loan/purchase being ok for DFE (providing your brother doesn't use your buy as part of his security).

[Not official legal/financial advice]. Good luck...

Regarding tax implications, I suggest for you and your brother: find a good tax accountant!

* https://www.fanniemae.com/content/guide/selling/b2...