Bank asking what i'm doing with the funds?

Private Lending & Conventional Mortgage Advice

Bank asking what i'm doing with the funds?

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.

0 Reply

279 views

Most Popular Reply

Jason D.

Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes

@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!

25 Reply

See this reply in the discussion

68 Replies

Jump to latestLatest

Sort by

Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
7y
Originally posted by @Kyle J.:

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?
I still say it's none of their business. So sure, I'm a lender: if someone was doing a refi of their house, of which I'm doing x% LTV so my loan is secured by the home, wtf do I care what they're doing with the $? If they decide to light the money on fire, or do something I "approve of", I still have the same $ secured by the same property. No different than if someone came to me to buy a home and I was loaning that same x% of an LTV and they were putting up a down payment. Both cases I have x% equity put up, they have y% equity.

Asked another way, and let me get this straight: I find a $100k home I want to buy, a bank will loan me $80k (with the property to secure their loan) and I put up $20k. So the bank has $80k of debt secured by the property, and I have $20k of equity. No problem. Totally normal.

But if I pay $100k cash for a home, and then go to a bank to give me $80k after (with the property to secure their loan), where by the bank has $80k of debt secured by the property, and I have $20k of equity -- somehow this is different?

How so?
I buy properties all the time in cash, so I can close quick and easy, then refi out later. The bank is going to loan me x% of the value/purchase price (depending on refi/purchase) in either scenario. All I'm doing on the refi route is getting my cash back out that I put in because I didn't get a loan originally.

So what I'd tell a bank is I'm going to use that cash to buy another property in cash, and do the process all over again
2 Reply
Ryan Jopson
Real Estate Investor · Hamden County, MA · Member since 2017 · 75 posts · 31 votes
7y
@Mike F.
"Investment Purposes" seems to be a practical and simple answer that gets the job done
2 Reply
Henri Meli
Investor · Morrisville, NC · Member since 2012 · 1k+ posts · 673 votes
7y
@Mike F. . It is the banker doing due diligence. I used to work in Bank Security, this is called KYC (Know Your Customer). Certain answers/behavior will trigger "Money Laundering" suspicions. When large sums of cash are involved in the transaction, the bankers are required to ask. Once they know you better and understand the types of activities you do, they won't ask these questions anymore. Some bankers see 100s of people daily. They have no way of reading your mind and know your intentions. Answer the question as honestly as you can. It is their business and part of bank compliance with federal laws. If they fail to do their job, they will get slapped with massive fines.
5 Reply
Shawn M.
Investor · New Haven, CT · Member since 2012 · 285 posts · 175 votes
7y
@Mike F.
The best answer is home improvement, add a bathroom, update the kitchen, redo the windows. Anything that increases the value of the asset securing the loan is a good answer.
4 Reply
Margaret J.
Real Estate Agent · Tempe, AZ · Member since 2009 · 30 posts · 22 votes
7y
Earlier this year I did a re-fi of a property that I owned free and clear. I did not think it was a big deal to get cash out, but it took me months and months and three different banks before they would put the loan through. Not sure why they have such a hard time with this, becasue it's an investment property and not my owner occupied property? I don't remember the reason WHY being difficult. For me I was consolidating other debt and taking out enough for.... yep... a down payment for another property. So I went through all that paperwork three times!
1 Reply
Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
7y
Originally posted by @Margaret J.:

Earlier this year I did a re-fi of a property that I owned free and clear. I did not think it was a big deal to get cash out, but it took me months and months and three different banks before they would put the loan through. Not sure why they have such a hard time with this, becasue it's an investment property and not my owner occupied property? I don't remember the reason WHY being difficult.
Most loan originators do not work with a lot of real estate investors. It's a specialization. Zero hours of our pre-licensing education or testing cover it, it's 100% OJT.
If I went to a podiatrist because I had the flu, it wouldn't work out too well. That sounds like a silly example, but imagine if doctors were 100% commission and also responsible for bringing business in the door and referral fees were illegal... "absolutely, I'm great at helping folks with the flu!" says the podiatrist who hasn't even helped someone with so much as the common cold in 36 months.
You can blame the podiatrist to a certain extent, but consider the incentive structure that has been created.
5 Reply
Account Closed
Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ 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.
Long ago when I was a loan officer, I asked the prospective borrower why they were refinancing and they said "I have to be honest, I lost all my money on the tables in Las Vegas". The bank declined the loan. True story. It taught me a lesson in dealing with people regarding real estate and large sums of money, If I want my money back at some point, I need to be reasonably sure I'm going to get it.
1 Reply
Greg H.
Rental Property Investor · Phoenix, Arizona & Arkansas · Member since 2015 · 31 posts · 15 votes
7y
@Mike F. My banker asked me over the phone,"What will the loan be used for?" Before I answered with an acceptable answer, the banker asked, "home improvement?"
1 Reply
John Clark
Member since 2018 · 1k+ posts · 1k+ votes
7y
@Cody L "But if I pay $100k cash for a home, and then go to a bank to give me $80k after (with the property to secure their loan), where by the bank has $80k of debt secured by the property, and I have $20k of equity -- somehow this is different?"
------------------------------------------
Yes it is. Look up the difference between purchase money mortgage priority in settling debts and regular debt, even secured debt. Purchase money mortgages can avoid arguments by other secured lenders and blanket lien holders that they come first.
0 Reply
Daniel Sprague
Rental Property Investor · Mankato, MN · Member since 2015 · 47 posts · 13 votes
7y
If the purpose of the cash out has to do with acquisition of more real estate, that Will affect your Debt to Income Ratio. This is why if you state that the purpose is to buy another piece of R.E they ask for the purchase agreement/property address... so they can factor in R.E. taxes and estimated insurance, along with possible principle and interest obligations. If (like most people) you are not under contract, and simply want access to it for future needs they should leave it at that, and not require anything else besides a letter from you stating you aren't under contract. The point is at "time of application" the bank needs to underwrite the file correctly, and if you are purchasing another piece of real estate the liabilities associated with it need to be considered. There are also more generic reasons (listed above) that have to do with the Patriot Act and making sure the lender "understands" their customer.
0 Reply
Hutcherson Yearwood
Rental Property Investor · Lake County, IL · Member since 2016 · 34 posts · 11 votes
7y
Hi @Mike F. Would simply say for investing. If they ask in what? My reply would be In real-estate and leave it at that.
0 Reply
Kiley N.
Honolulu, HI · Member since 2017 · 231 posts · 191 votes
7y
@Mike F.
The question of why the bank is asking appears to be covered but to summarize:
1. Regulatory (e.x. money laundering laws, KYC)
2. Due diligence: It is prudent for the lender to understand the use of its funds.
3. Reputation Risk: Beyond regulation, there is also a PR risk if the lender ends up financing illicit activity.
Honesty is the best policy. If I lend and find out over time that someone lied, that brings their character into question. The answer to whether the funds were used for their stated purpose will generally be reflected in the next set of updated financials.
2 Reply
Anthony Wick
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
7y
My new bank asked me if I was intending to use the LLC account for "over seas gambling". Well, no. But, if I was I sure wouldn't tell them I was going to do that!
0 Reply
Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
7y
@Mike F. It is a fundamental of borrowing that you should be prepared when applying for financing.The bank wants to know how they are going to get paid back. The better job you can do selling them on how their money will be used and how that is a safe investment the better you chances.
If you are refinancing your personal home, then if the bank gets to nosy go to another bank. If it is a loan on an investment property you better be prepared or the answer is no.
0 Reply
Brit Zamoyta
Specialist · NY · Member since 2018 · 5 posts · 1 vote
7y
the answer is simple, "reinvesting into the market".
0 Reply
Shiva Bhaskar
Investor · Los Angeles, CA · Member since 2017 · 523 posts · 476 votes
7y
Originally posted by @Henri Meli:

@Mike F. . It is the banker doing due diligence. I used to work in Bank Security, this is called KYC (Know Your Customer). Certain answers/behavior will trigger "Money Laundering" suspicions. When large sums of cash are involved in the transaction, the bankers are required to ask. Once they know you better and understand the types of activities you do, they won't ask these questions anymore. Some bankers see 100s of people daily. They have no way of reading your mind and know your intentions. Answer the question as honestly as you can. It is their business and part of bank compliance with federal laws. If they fail to do their job, they will get slapped with massive fines.
Was cracking up at some of the comments earlier, but what Henry said. Am an attorney myself, and know someone who was an attorney in this field of law - the risks of non compliance are massive for banks, thanks to provisions in the Patriot Act. They need to show they did due diligence. Just a few years ago, HSBC got into hot water for not exercise such diligence (or looking the other way deliberately, more likely) and laundering billions for Mexican drug cartels.
But yeah, what others said, let them know the refi money is being used to acquire other investment properties, in the next ___ months (just a general idea of when you may buy).
5 Reply
Anthony Cecena
Rental Property Investor · Arroyo Grande, CA · Member since 2015 · 17 posts · 3 votes
7y
@Mike F. Honesty is always the best way to answer. I've pulled money out to start a gym, to remodel my kitchen and to by another property and guess what my bank went the extra mile and had a customer who sold gym equipment and I ended up saving thousands of dollars just because I answered honestly. It definitely paid off to be honest . Now if they just knew of a great off market MFR deal that would be amazing! Lol!
Best
0 Reply
Joel Florek
Rental Property Investor · Michigan City, IN · Member since 2015 · 530 posts · 741 votes
7y
@Mike F. Always be honest with your bankers. They will be your best partners unless they no longer have trust in you. Let them know your goals and what you plan to focus your investment capital on.
1 Reply
Brian Ploszay
Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes
7y
If you have to answer, then give a conservative response. "I am keeping an adequate portion of cash, for reserves for my family and emergency issues with my investments."
0 Reply
Alecia Ashby
Rental Property Investor · Los Angeles, CA · Member since 2016 · 29 posts · 10 votes
7y
@Mike F. My banker specifically told me to say kitchen renovation as I was using mine for a down payment on more properties. He said that would cause a lot more work for no added bonus. :)
1 Reply
Irina Belkofer
Real Estate Broker · Cleveland, OH · Member since 2017 · 719 posts · 658 votes
7y
Originally posted by @Alecia Ashby:

@Mike F. My banker specifically told me to say kitchen renovation as I was using mine for a down payment on more properties. He said that would cause a lot more work for no added bonus. :)
I second that: when I was applying for my HELOC, I told my LOthat I'm going to use this as POF for offers to buy houses. She adviced to put some my home updates vs new properties to buy
0 Reply
Henri Meli
Investor · Morrisville, NC · Member since 2012 · 1k+ posts · 673 votes
7y
@Shiva Bhaskar You are right on point.
I once worked for a bank that got fined $14 Billions (Yes Billions). No, it wasn't KYC ... but ... compliance is no joke at banks. People lose their jobs and reputations over this. I can tell lots of real life stories ...
In addition, people need to be very careful what they answer. Because if it is found later that the answer was meant to mislead, then they could find themselves with legal bills, just to clear things up. I have seen benign answers turn innocent situations into sleepless nights.
1 Reply
Milian Bonillo
Rental Property Investor · Chicago, IL · Member since 2018 · 54 posts · 44 votes
7y
@Mike F. It makes sense as they are deciding whether it’s safe for them to lend the money. I was very offended when a banker asked my husband and me where we got our money during a deposit we made. We both felt that was really out of line, as we were not there to borrow any money, only deposit. I said it was from a “negotiated transaction”, and that put an end to the questioning about it.
0 Reply
Jesse Harris
Flipper/Rehabber · Richmond, VA · Member since 2018 · 57 posts · 19 votes
7y
@Mike F.......As Charlie Harper would say, “Drugs and Hookers, do you have any good contacts?”
0 Reply
Alex BekezaBusiness Member
Lender · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
7y
This thread had gone way off the rails......
The lender is working within a set of guidelines. Each box must be checked for a loan to fund.  One of which may be documenting how you intend to use cash out proceeds. They MIGHT even want it to be handwritten and wet signed.
They don't get paid unless the loan funds in most cases and the last thing they are trying to do is hassle you.
Loan Officers work FOR you but need you to work WITH them.
Like many people have already put out there. A simple "The cash out proceeds are for business purposes only. This is an investment property." is really all they're asking for.
Besides, if you are really executing a BRRR, then what in the world is there to hide?
There are a huge variety of answers which are perfectly acceptable in most cases......
[email protected]818-606-8823
Investor Property Loan5306 Reviews
Website View Page
1 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.