Newb - How do Banks treat HML when doing a Re-Fi?

8 Replies

Thanks in advance. I have zero financial background, and I’m trying to wrap my cranium around the finance part of BRRRR. Bottom Line Up Front (BLUF): if I use a personal friend to loan me money to buy my first property, can I still use the “cash out” REFI technique with a bank in my BRRRR strategy? If a family friend lends me $30,000, for example, to buy a foreclosure, where does the lien/title reside? Does my friend get the paperwork in his name or is all of that “in the background”? Would the seller (bank) even care where the money comes from? Reason I’m asking is because I’m now confused on the REFI portion to follow. I get my house, fix her up, get a tenant, and then go to REFI...how would the “cash out” portion actually work in his case? Let’s say my rehabbed rental is now appraised at $80,000...and I get a mortgage now for $80,000, what does the bank look at? Do they get info on my personal debt with a friend? Is that legal? Can I expect to get some cash after the LTV - 30k owed to some other entity? I’m sure this was very confusing...thanks, guys. Bryson

if your friend creates a note for you and places a lien on your home it's treated just like a mortgage and during closing the note gets paid off.

if on the other hand you best friend just slips you 30K, the bank doesn't care. you get a check for 80% or 75% ARV, and it's on you to pay your friend back.

you don't have to disclose where the cash came from during the REFI.  (I think).

If your buddy recorded a trust deed/mortgage, the closing agent would request a payoff demand from him asking how much is required to payoff his loan, $30k in this case.  Based on that demand the closing agent would give him $30k, reconvey his loan and record a new trust deed/mortgage in favor of the new lender for $80k.  At that point your friend is paid in full and the new lender has a lien in first position.  You would receive $50k (80-30).  These numbers don't include closing costs, interest, etc.

If your buddy didn't record a trust deed/mortgage, he would not be involved in the closing at all.  He would simply have to trust you to pay him back.

BTY, I doubt any lender will give you a $80k loan against a $80k appraisal.

Thanks all. Copy that.

So, IF, my friend does the deed, does that include paperwork with an interest rate? So the bank would have to contact him or her with the “payoff”, correct.

Yeah I would not expect a 100% LTV. I was trying to make the math easy.

Thanks

Originally posted by @James Byrd :

Thanks all. Copy that.

So, IF, my friend does the deed, does that include paperwork with an interest rate? So the bank would have to contact him or her with the “payoff”, correct.

Yeah I would not expect a 100% LTV. I was trying to make the math easy.

Thanks

 There would be two instruments, a note and a deed of trust or Mortgage.  The note would specify the terms of the loan ... interest rate, term, prepayment penalty if any, late fee, etc.  Arizona I believe is a deed of trust state so the lien instrument would be a deed of trust, not a  mortgage.  If there is just a note it would be an unsecured loan, still a loan but not secured.  The problem with an unsecured loan for 30k is that if you decided not to pay he would have to go through the court system to get a judgment costing him way more than $30k and still he would only have a judgment, so, in my view an unsecured loan depends soley on trust.

@Harjeet Bhatti Thanks. What is the purpose of the 6 months? Is that federal law or state-dependent?

Account Closed Thanks. So, if I were to build a deal for presentation to this "friend", what's the most appealing and safe for him? Are private money loans from friends typically "secured" by something? What about your typical "hard money lender"? Do these investors typically tie their loan to a "mortgage"? The reason I'm using $30k in my example is because that's the window for my criteria.

If you are trying to use the "Delayed Financing" exception a couple of things you should keep in mind, #1 you must have paid all cash for the property (no borrowed funds for purchase) and no liens on the property #2 you can use the maximum LTV allowed for purchase of property (ie. for an owner occupied property 97/95% LTV or non-owner occupied max is usually 80-85% LTV) #3 must refi within 6 months of purchasing the property (so for the most part you are going to use the purchase price plus improvements rather than the new appraised value) #4 property will have to qualify condition wise within the lenders guidelines, so no major work should be outstanding like broken windows, holes in the roof, ect.

You should not have the 'friend' record a deed on the property, have a contract between the two of you for business purposes and purchase the property jointly and pay back based on the contract/agreement you have with them.

There are other types of loans like Hard Money & Non-QM programs that may have different guidelines that can help you as well, but, the Delayed Financing option will give you the best long term rates for a longer term hold with fast repayment of most of your capital.