Bank asking what i'm doing with the funds?

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Bank asking what i'm doing with the funds?

Mike F.
SC · Member since 2015 · 35 posts · 13 votes

I'm doing a cash out refi and the bank is asking me, "what am I doing with the funds', what is the right/wrong answer to this question?

Obviously, they have never heard of BRRRR method.

thanks in advance for any insight.

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Jason D.
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
7y
@Mike F. Right answer: paying the current loan and using the remaining cash to continue purchasing assets. Wrong answer: Going to the casino and putting it all on black!
25Reply
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  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    7y

    The truth? And of course they have heard of it. They may just not of heard of it called "BRRR" which is a new term,

    10Reply
  • Philip McCleary
    Rental Property Investor · Houston, TX · Member since 2018 · 44 posts · 31 votes
    7y

    It is really none of their business but if your buying an asset or flip just be honest. 

    1Reply
  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    7y
    @Mike F. Right answer: paying the current loan and using the remaining cash to continue purchasing assets. Wrong answer: Going to the casino and putting it all on black!
    25Reply
  • Mike F.
    OP
    SC · Member since 2015 · 35 posts · 13 votes
    7y

    I paid cash for the property, no mortgage or debt associated what so ever. I agree its none of their business but they are asking. 

    Just to clarify the correct answer is? 

    FYI: I don't have another property lined up for purchase yet. 

    0Reply
  • Ryan Mayes
    Rental Property Investor · Albion, NY · Member since 2015 · 5 posts · 15 votes
    7y

    we had this issue. We said we want the money to buy another property in the future. They wanted to know purchase price, location, ect. before moving forward. So we said we changed our minds and wanted the extra money to go on vacation instead...no more questions about it and it went thru smoothly.

    They would rather you waste it then "risk it" in real estate... not sure how that makes sense

    12Reply
  • Matt K.
    Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
    7y

    Recpature some liquidity from my asset and securing long term lending with a 30 yr note.

    So I can take the Vegas vacation I've always dreamed of.

    6Reply
  • Eric Veronica
    Lender · Cleveland, OH · Member since 2011 · 587 posts · 435 votes
    7y

    @Mike F. you are recapturing your cash that you used to purchase the property.  That is a sufficient explanation. 

    As @Ryan Mayes stated If you write that you are acquiring another property it is very likely that the lender will ask for details on the property you are purchasing.  

    22Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    7y

    Of course it is their business!! It is their money! If you want a relationship with this bank or other banks going forward, truth is your friend. 

    13Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    7y

    @Eric Veronica has the perfect answer. 

    2Reply
  • Kyle J.
    Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    7y

    When applying for a loan to initially purchase a property, it's obvious why you're applying for the loan.  However, it's not as obvious when you're applying for a line of credit or trying to pull money out of a property you already own. 

    I've had to answer this type of question every time I've applied for a cash out refi or a HELOC or a similar type of loan. I just answer it honestly (i.e. for cash reserves, to purchase another property, or whatever the reason was at the time). Make sure the bank you're applying with is okay with your stated use though. Most banks have reasons they do NOT allow the money to be used for, and buying another property can be one of those reasons believe it or not.

    To those who say "it's none of the bank's business" what the money will be used for, I'm sorry but you're wrong.  Like @Mary M. said, it's their money and they have every right to ask.  I'm a borrower but I'm also a lender and I can't imagine loaning out a large sum of money without asking the person what they intended to use it for.  Would any of you?

    8Reply
  • Casey Powers
    Las Vegas, NV · Member since 2018 · 403 posts · 474 votes
    7y

    As part of the “know your customer” thing that has been around since shortly after 911, it is their business to ask such questions. So banks have been asking people what they’re doing with their own money for about 17 years now, as a rule. They may not ask as much to people who have established a relationship with them.

    It’s not that big a deal. Just tell them what you’re doing. 

    8Reply
  • Anthony GaydenPro Member
    Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
    7y
    Originally posted by @Mike F.:

    I paid cash for the property, no mortgage or debt associated what so ever. I agree its none of their business but they are asking. 

    Just to clarify the correct answer is? 

    FYI: I don't have another property lined up for purchase yet. 

     It seems to me that it is actually their business. After all they are the ones giving you the money.

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    5Reply
  • Account Closed
    Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes
    7y

    I was always asked why I was taking out a HELOC. The bank wanted to make sure I was going to use the money "responsibly" and not do something reckless with it. Even though my home was securing the loan, banks do not want to have to foreclose and become owners of real estate (that's not the business they're in). I understand in recent years some banks require borrowers to show a budget (that's what one of my friends told me when he took out a second mortgage). The details of the budget didn't matter as much as the fact he had a budget.

    I always made sure I gave an acceptable answer for why I was taking out the HELOC. Banks do not want people to borrow the money and gamble it away at a casino. To people who are not on BiggerPockets, borrowing money to buy income property might be considered gambling because they've never done it themselves (although they had an uncle who bought income property once and lost all of his money). Some of my neighbors thought I was unemployed because my car was parked in my driveway all the time while I worked from my home office (commuting via the Internet). Working from home was something they could never grasp because it was outside their own personal experience.

    3Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Casey Powers:

    As part of the “know your customer” thing that has been around since shortly after 911, it is their business to ask such questions. So banks have been asking people what they’re doing with their own money for about 17 years now, as a rule. They may not ask as much to people who have established a relationship with them.

    It’s not that big a deal. Just tell them what you’re doing. 

     YUP patriot act..  good catch. 

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    1Reply
  • Casey Powers
    Las Vegas, NV · Member since 2018 · 403 posts · 474 votes
    7y
    Originally posted by @Jay Hinrichs:
    Originally posted by @Casey Powers:

    As part of the “know your customer” thing that has been around since shortly after 911, it is their business to ask such questions. So banks have been asking people what they’re doing with their own money for about 17 years now, as a rule. They may not ask as much to people who have established a relationship with them.

    It’s not that big a deal. Just tell them what you’re doing. 

     YUP patriot act..  good catch. 

    I’ve been asked what I’m doing with the money when taking money out of my own account. Basically anytime it’s not a “normal” transaction that you do, the bank will ask what it’s for. I would expect they’ll always ask what any loan is for as well. 

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Casey Powers:
    Originally posted by @Jay Hinrichs:
    Originally posted by @Casey Powers:

    As part of the “know your customer” thing that has been around since shortly after 911, it is their business to ask such questions. So banks have been asking people what they’re doing with their own money for about 17 years now, as a rule. They may not ask as much to people who have established a relationship with them.

    It’s not that big a deal. Just tell them what you’re doing. 

     YUP patriot act..  good catch. 

    I’ve been asked what I’m doing with the money when taking money out of my own account. Basically anytime it’s not a “normal” transaction that you do, the bank will ask what it’s for. I would expect they’ll always ask what any loan is for as well. 

    I am proactive with my bank.. when I am getting a large wire mid 6 to low 7 figure from off shore .. I let them know in advance.. when how and who.. And all of my folks I work with have personally met my private commercial banker.. that way they check the patriot act know they client box.. since we most substantial amounts of money each week..  It was one thing when I had monster lines of credit with them it was THEIR money I was moving now that I moved to all equity.. they just need to really know were this cash is coming from and from who.

    now its on a level above a basic cash out refi of course.. but its the same principal..   

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    JLH Capital Partners51 Review
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    1Reply
  • Account Closed
    Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes
    7y

    I've had investment officers from crowdfunding sites call me for a 15 minute chat. One of the questions they would ask is where I was getting the money I was going to use for investing. They wanted to make sure I wasn't taking out a cash advance on my credit cards. From the conversation, I could tell they were calling to get a feel for my level of understanding of alternative assets. They didn't want any bad PR resulting from clients who got in over their heads with these relatively non-liquid investments.

    0Reply
  • Jim K.
    Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
    7y

    My answer is always "home improvement." They've always been happy with that.

    4Reply
  • Alvin Sylvain
    Los Angeles · Member since 2018 · 464 posts · 471 votes
    7y
    @Jason DiClemente everybody knows it should be RED!
    5Reply
  • Mike F.
    OP
    SC · Member since 2015 · 35 posts · 13 votes
    7y

    thanks to everyone that has replied! 

    I'm trying to filter through all the replies and decide what the bank wants to hear. This all seems a little foolish but I don't want misstep at this point. Its a cash out refi for over 100k, not a HELOC, (its with a big bank).

    The reply below seems very safe and i'm thinking I might go this route.

    "Recapture some liquidity from my asset and securing long term lending with a 30 yr note."

    Anyone else on the board that's done a cash out refi with a big bank lately have any input?

    thanks folks!

    4Reply
  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    7y
    Originally posted by @Mike F.:

    I paid cash for the property, no mortgage or debt associated what so ever. I agree its none of their business but they are asking. 

    Just to clarify the correct answer is? 

    FYI: I don't have another property lined up for purchase yet. 

     I'd say you just stated your own perfect answer: "I don't have another property lined up for purchase" (Just want to be ready). 

    0Reply
  • Mike F.
    OP
    SC · Member since 2015 · 35 posts · 13 votes
    7y

    I appreciate everyone taking the time out to reply. Hopefully they like my answer.

    Happy New Years!

    :)

    0Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    7y

    A colleague of mine has a story that probably has at least some truth to it.

    He writes a letter saying what the HELOC will be used for.

    A week later, they ask for a letter asking what the HELOC will be used for.

    He re-sends, along with some other minor conditions. 

    A week later, same thing. What is the HELOC going to be used for? That's all they ask for, nothing else.

    Fourth time they ask, he finally writes a letter detailing his intent to spend the money on hard drugs and booze while on vacation in Columbia...

    ...Wouldn't you know it, the HELOC gets final approval and he gets his credit card in the mail a week later.

    Best guess is that it was the big bank LO or processor that kept misplacing it or putting it in the wrong digital folder, and when she saw that letter she finally started paying closer attention to what was/wasn't being submitted to underwriting, and poof problem solved. 

    7Reply
  • Craig Jeppesen
    Rental Property Investor · Chubbuck, ID · Member since 2018 · 532 posts · 466 votes
    7y

    Your lender is doing its due diligence in deciding on giving you a loan. It is simply part of their underwriting. It is their money and they are taking a risk by giving it to you and want to make sure they get paid back. They are doing nothing wrong and you should be completely honest with them and give them a good answer. If you have a property picked out to purchase you should give them the details. They deserve to know the numbers to ensure repayment. If you don’t have a property yet then you can be vague and say future investing.

    2Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Mike F.:

    I'm doing a cash out refi and the bank is asking me, "what am I doing with the funds', what is the right/wrong answer to this question?

    Obviously, they have never heard of BRRRR method.

    thanks in advance for any insight.

    Hookers and blow.

    But seriously, IMO it's none of their damn business.  If they were loaning you money that had no collateral then that's one thing. But they're giving you a loan, secured by equity in the home.  So I'd have a hard time not giving them a smart azs answer. 

    4Reply
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