Using LOC to buy and cash-out refinance after seasoning?

4 Replies

If I were to obtain a personal line of credit to combine with my own capital in purchasing/rehabbing a property, how would this affect me when it comes time to cash-out refinance?

@Account Closed in short, this is possible.  However, there are a lot of restrictions to doing this type of transaction.  if you purchase with an unsecured Line of Credit it will cause some challenges with a traditional refinance.  If the Line of Credit is secured against a piece of real estate that would help in most most cases.  However, I did write a pretty lengthy article on "How to Purchase a Property with Cash" at this link HERE and following that strategy will help you in not facing any "unusual" restrictions.

It's pretty lengthy but feel free to tag me with any questions.  Thanks!

@Andrew Postell Very well written post thanks for sharing. For the purpose of my project, I am looking to borrow $70k to purchase the property, fully fund the rehab ($12.5k) with personal cash, rent it out and cash-out refinance 75% LTV (ARV of $115k) after the 6 month seasoning period. When the dust settles, I expect to have 'bought' equity at a discount (i.e. $28,750k equity for a net out-of pocket cost of $8k).

The strategy and numbers make complete sense; however, I am concerned that using a Personal or Business Line of Credit will cause issues when applying for the new Cash-Out Refinance mortgage. Can it simply be explained away or will it be viewed strictly as debt and, thus, negatively go against me?

@Account Closed if you don't want to wait the 6 months you can follow what I wrote in that article.  Also, if you want a better rate the article strategy does help.  But when you are using a business line of credit, if you deposit the funds into your business account, it won't matter.  Sourcing and seasoning deposits into a business account is not needed for Fannie/Freddie loans (assuming that's the loan type you will use).  They would require explanation in your personal accounts.  And unsecured funds into your personal account could earn a decline on your loan.  Where it get's confusing is that banks have these things called "overlays".  Overlays are extra rules that lenders put on top of Fannie/Freddie (and others) guidelines.  So if you hear "we have a minimum credit score requirement of X"...that is an overlay.  There is no minimum credit score requirement to Fannie/Freddie.  And the same could be for the business deposits.  Fannie/Freddie do not require business deposits to be sourced.  So deposit them in there so it won't affect your loan.

*WHEW*  Lot's to know.  I'm in Texas too so feel free to reach out if you would like.  Thanks!

You could still capture 100% of your initial investment back if it appraises correctly. Use the delayed financing exception. To recapture your rehab costs, you'd have to include them as an assignment to your contractor at time of initial cash purchase on the HUD-1. You'll get 75% LTV or 100% of purchase price (including assignments on the HUD). You can also put things like first year's insurance in the initial HUD as an assignment to recapture all of that capital. You don't have to do the LLC to yourself shuffle if buying in borrowed cash, so long as the borrowed cash isn't secured against the property you are purchasing. Any borrowed funds would simply be satisfied on the refi before paying you money from your initial investment. Plus you can do this on day one after the cash purchase. The only stipulation is that you'd want rehab complete, and you HAVE to have a rental contract in place to execute DFE.

DFE is a great program that far too people truly understand. I wish more lenders with familiar with it.