Will I Have a Problem Refinancing after Buying Cash?

50 Replies

Hi all! I'm finally ready to make the leap and purchase my first buy-and-hold rental property. 

I've recently found one that I like a lot, however they want cash for it. While I have about half the cash on hand, I'd like to take out a personal loan to purchase the home in full and then take out a mortgage on the home for about 75 to 80% LTV, like I've read quite a few people do here. However, I'm worried that I'll run into issues with taking out a mortgage for whatever reason.

So my questions are: Are there any circumstances where I won't be able to refinance? How long until I can take out a mortgage on the home after purchasing it in cash? I'm afraid of being stuck with a 7 year personal loan for longer than absolutely necessary. 

First and foremost tell us about your job, income, credit, debt, rental property details, etc.

Hi! So, like most loans, it'll depend on your credit score and overall financial picture. They'll want to see your income and reserves probably. So if you can typically get loans easily, it should be fine.

Each lender/bank is different. Some banks (perhaps smaller local ones) might have no minimum time that you own the house before they let you cash-out refi. Other's have 6 months. And others yet make you wait a full year!! Call around. Go to banks in person and have a chat about your plans. See what their guidelines are on this.

Keep in mind the amount paid in cash. If it is only 75% of your expected appraised value, you can expect to get all of your cash back. If you don't expect it to appraise for enough, you'll have a plan to pay off any remaining amount from your personal loan. But that shouldn't happen since you're paying half with your own cash. But it's always nice to get all (or more but that's typically hard in today's market) of your "cash" money back so that you can recycle that pot of money over and over again.

Just to add on to @Nicole A. keep in mind that 75% she referenced is only if it's a SFH.

If it's a multifamily property then Fannie/Freddie guidelines will cap you at 70% LTV.

Account Closed Thank you so much for your input. I know it'll have no issues appraising for more than what I'm getting it for, even if I weren't paying half with my own cash, but regardless. Wow I didn't know some banks had "waiting periods." I'll definitely call around and check that out now while I still have some time before my desk job. Thanks again!

Nicole said it best. Talk to the bank now and get it ironed out beforehand. Get pre-approved and learn all of their criteria for this type of transaction. Generally though you will need 6 months for cash out refis. 

One last question, if anyone could help me out: do I need to specific whether or not it's a rental or primary residence for a refinance? Does it make a difference?

They will likely ask, yes, and it'll probably change the terms of the loan such as interest rate or percentage they'll cash out. This is more details they can share with you when you go around interviewing various banks.

@Nicole mentioned some really good points, as well as everyone else on the thread and one of them was having the pot of cash to recycle over and over. That being said, do yourself a favor and look into a personal line of credit (as well as the personal loan you mentioned) and do your homework on a home equity line of credit (as well as the cash out refi you mentioned), especially if the property will have lots of equity built in. This normally requires you to utilize the property as your primary for a period of time before utilizing it as a rental. However, both of these options allow you to rinse and utilize the cash again and again. Just food for thought.

Happy Investing...

I don’t see anyone mentioning delayed financing exemption, where one can refinance before six months, when paying all cash at purchase.

There are also HELOC's out there for cash out investment properties, not many and higher interest, but sometimes the guidelines are better, as well as lower closing costs.

Originally posted by @Kerry Baird :

I don’t see anyone mentioning delayed financing exemption, where one can refinance before six months, when paying all cash at purchase.

Unfortunately, if OP wants max LTV, the exception will not cover this circumstance.

Purchase funds are scrutinized the same as a down payment when using DFE (the "source all large deposits" game that I'm certain everyone here loves, amirite?), with all the same rules, and OP is using unsecured borrowed funds for half the purchase price, which is a no-go for DFE just like swiping a credit card for a down payment is a no-go for a purchase transaction involving a conventional mortgage.

After six months, DFE is no longer needed, no one will question the source of the purchase funds, and OP can go to max LTV.

Originally posted by @Chris Mason :
Unfortunately, if OP wants max LTV, the exception will not cover this circumstance. 

Purchase funds are scrutinized the same as a down payment when using DFE (the "source all large deposits" game that I'm certain everyone here loves, amirite?), with all the same rules, and OP is using unsecured borrowed funds for half the purchase price, which is a no-go for DFE just like swiping a credit card for a down payment is a no-go for a purchase transaction involving a conventional mortgage.

After six months, DFE is no longer needed, no one will question the source of the purchase funds, and OP can go to max LTV.

 Hey Chris. If we are buying with our own cash and just need a few weeks to get the property to bankable condition,  are we pretty much limited to 6 month seasoning before we can get a cash out refi based on appraised value?  Doesn't DFE only fund up to 70% of PP? Thank you for any clarification!

Some local banks do not require a waiting period. My bank doesn't have a waiting period but I also take out HELOCs as opposed to cash out refinance. Maybe that's why I don't have a waiting period, I dunno. 

Originally posted by @Derrick E. :

Some local banks do not require a waiting period. My bank doesn't have a waiting period but I also take out HELOCs as opposed to cash out refinance. Maybe that's why I don't have a waiting period, I dunno. 

Good idea, Derrick. Wouldn't think getting a Heloc on a rental was possible. Was it hard to find that bank? A regional or community bank I assume?

Are they giving you the equity line on appraised value right away? That would be awesome.  I can't imagine your own comp not reducing your appraised value if you got it at a nice discount though! 

Originally posted by @Steve Vaughan :
Originally posted by @Chris Mason:
Unfortunately, if OP wants max LTV, the exception will not cover this circumstance. 

Purchase funds are scrutinized the same as a down payment when using DFE (the "source all large deposits" game that I'm certain everyone here loves, amirite?), with all the same rules, and OP is using unsecured borrowed funds for half the purchase price, which is a no-go for DFE just like swiping a credit card for a down payment is a no-go for a purchase transaction involving a conventional mortgage.

After six months, DFE is no longer needed, no one will question the source of the purchase funds, and OP can go to max LTV.

 Hey Chris. If we are buying with our own cash and just need a few weeks to get the property to bankable condition,  are we pretty much limited to 6 month seasoning before we can get a cash out refi based on appraised value?  Doesn't DFE only fund up to 70% of PP? Thank you for any clarification!

 It'll be up to the lesser of the normal cash out LTV cap for the given unit count and occupancy, or the purchase price + closing costs. That means that if it appraises for a crap ton over your purchase price, your new mortgage can make you whole again in terms of the full amount of your purchase money, but not your reno money.

Originally posted by @Steve Vaughan :
Originally posted by @Derrick E.:

Some local banks do not require a waiting period. My bank doesn't have a waiting period but I also take out HELOCs as opposed to cash out refinance. Maybe that's why I don't have a waiting period, I dunno. 

Good idea, Derrick. Wouldn't think getting a Heloc on a rental was possible. Was it hard to find that bank? A regional or community bank I assume?

Are they giving you the equity line on appraised value right away? That would be awesome.  I can't imagine your own comp not reducing your appraised value if you got it at a nice discount though! 

Yes. It is a local community bank. I called around 20-25 banks and they were the only ones I found who did this. It's considered commercial and has a higher interest rate but no complaints from me. 

Yes I can do a HELOC immediately if I wanted to. I usually buy homes that need rehabbed though so it still takes 6-8 weeks for me to get them fixed up and ready to take out a HELOC.

Originally posted by @Chris Mason :
Originally posted by @Kerry Baird:

I don’t see anyone mentioning delayed financing exemption, where one can refinance before six months, when paying all cash at purchase.

Unfortunately, if OP wants max LTV, the exception will not cover this circumstance.

Purchase funds are scrutinized the same as a down payment when using DFE (the "source all large deposits" game that I'm certain everyone here loves, amirite?), with all the same rules, and OP is using unsecured borrowed funds for half the purchase price, which is a no-go for DFE just like swiping a credit card for a down payment is a no-go for a purchase transaction involving a conventional mortgage.

After six months, DFE is no longer needed, no one will question the source of the purchase funds, and OP can go to max LTV.

Hmmm. I'm surprised to hear that using (a percentage of) "unsecured borrowed funds" precludes DFE. I know that Fannie Mae specifies "that no mortgage financing was used to obtain the subject property", and, requires that "The sources of funds for the purchase transaction are documented (such as bank statements, personal loan documents, or a HELOC on another property)", but, is there a clause that actually forbids using "unsecured borrowed funds" as part of a "cash" closing, before applying for DFE within 6 months? 

Or, are you just saying people shouldn't then expect "max LTV" with DFE? Just askin'...

Originally posted by @Brent Coombs :
Originally posted by @Chris Mason:
Originally posted by @Kerry Baird:

I don’t see anyone mentioning delayed financing exemption, where one can refinance before six months, when paying all cash at purchase.

Unfortunately, if OP wants max LTV, the exception will not cover this circumstance.

Purchase funds are scrutinized the same as a down payment when using DFE (the "source all large deposits" game that I'm certain everyone here loves, amirite?), with all the same rules, and OP is using unsecured borrowed funds for half the purchase price, which is a no-go for DFE just like swiping a credit card for a down payment is a no-go for a purchase transaction involving a conventional mortgage.

After six months, DFE is no longer needed, no one will question the source of the purchase funds, and OP can go to max LTV.

Hmmm. I'm surprised to hear that using (a percentage of) "unsecured borrowed funds" precludes DFE. I know that Fannie Mae specifies "that no mortgage financing was used to obtain the subject property", and, requires that "The sources of funds for the purchase transaction are documented (such as bank statements, personal loan documents, or a HELOC on another property)", but, is there a clause that actually forbids using "unsecured borrowed funds" as part of a "cash" closing, before applying for DFE within 6 months? 

Or, are you just saying people shouldn't then expect "max LTV" with DFE? Just askin'...

My statement only applies if OP wants to get max LTV. If they don't...

If the source of funds used to acquire the property was an unsecured loan or a loan secured by an asset other than the subject property (such as a HELOC secured by another property), the settlement statement for the refinance transaction must reflect that all cash-out proceeds be used to pay off or pay down, as applicable, the loan used to purchase the property.

Note the word "all." Not "some," or "a portion," or "half" of the cash out funds. This will have the effect of capping the new loan amount in OPs scenario, but if that borrowed money is at 9% or 12% it can still make sense. Alternatively, what I've done in the past is start the cash out refinance at the 4.5 month mark and close exactly after 6 months, to get around DFE limitations. 

To add to what others are saying about some banks not having a waiting period to do a cash-out refinance, this is true. They might tend to be small, local banks. 

The regional bank I work with does not have a minimum amount of time that I must own the property before they'll do a cash refinance. It simply needs to be already rehabbed and also rented out.

So shop around on your banks.

Not trying to highjack the thread but I’m curious about this too . I bought a triplex recently and some of the money used was a unsecured personal loan ( in my personal name) to purchase the apartment which I bought in my llc . I want to do a cash out myself next year . Will a a typical local bank give me trouble about a cash out if they see I took out a 20k personal loan even if I own the property free and clear .

Originally posted by @Dennis M. :

Not trying to highjack the thread but I’m curious about this too . I bought a triplex recently and some of the money used was a unsecured personal loan ( in my personal name) to purchase the apartment which I bought in my llc . I want to do a cash out myself next year . Will a a typical local bank give me trouble about a cash out if they see I took out a 20k personal loan even if I own the property free and clear .

From my limited experience (just started doing HELOCs as I paid cash for all my houses to start off with) they don't care as long as you have a DSCR of 1.25. I'm not even that familiar with DSCR but I'm trying to learn more about it.