Cash out refi is pegged to property or owner?

Question

Hi everyone,

Just doing some fundamental research on cash out refis on my first investment. Basically I will probably be paying all cash for two reasons: I have had difficulty qualifying for a conventional loan due to atypical income, and to be able to close quickly in a competitive market.

I'm wondering down the road when I do a cash out refi, does the lender look at my personal credit/finances as an individual, or do they look at the property itself solely as an income producing asset?

I was told at one point that if the property is under an LLC, the refi would be pegged to the LLC and the property only. But if it is owned in my name personally, then they would look at my personal finances.

Thanks for any guidance!

Chris Mason · Answer

Hi Christopher,

The LLC stuff has been answered to death 10,000 times on these forums, and the answer is 100% the same for all persons in all cases, without exception, I'll let you search for the answer on that. :)

The income requirements on a cash out refinance are basically the same as a purchase mortgage. The only difference is that on a purchase, the underwriter can use 'projected' income from the subject property, whereas on a refinance it has to be actively rented out to a long term tenant that has signed a lease and is actively paying rent. For your self employment income, it'll be the exact same calculation based on the exact same tax returns, assuming we're talking about good residential 30YF a-paper type financing.

Andrew Postell · Answer

@Christopher Davis just to clarify a little here there are 2 main types of loans for investors.  I'll call these "conventional" and "portfolio" loans.

Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names).  These loans are all 30 year fixed rate loans.  They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending.  Fannie/Freddie money = Fannie/Freddie rules.  NOT the bank's own money.  They require you to close in YOUR PERSONAL NAME.

Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money.  Sometimes referred to as "commercial" loans.  These loans are a lot more flexible than "conventional" loans.  Bank's money = Bank's rules.  If they like you, then maybe they will lend to you.  But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a shorter term.  The most common portfolio style loan in Texas is a 20 year adjustable rate loan.  These loans are easier to get but the terms are different. You can close on most loans here in a LLC name.

Fannie/Freddie types of loans will be available everywhere and those rules might change SLIGHTLY between lenders.  Portfolio loans can run the gambit.  Since each lender controls it’s own money you will have to call around to ALL the banks to learn about all the programs.  A mortgage broker will help with this some…but even the best mortgage brokers don’t’ have access to ALL portfolio loans out there.  Your income is likely not needed on the portfolio side.  But many will require your credit...it is possible that there could be one that doesn't....but probably harder to find.

Hope this helps.

Christopher Davis · Answer

Thanks so much. Agreed. I just need to ask around and target those investor friendly lenders. Learning a bit more every day.

Salvatore Lentini · Answer

@Christopher Davis - The key is finding investor friendly lenders...Then the financing is based on the property and not you.  I work with a handful of these lenders to grow my rental portfolio and have never looked back.  Traditional banks make it difficult to grow a portfolio once you own a few properties.

Christopher Davis · Answer

Thank you so much. I had a call with a credit union yesterday and they gave similar information. They would look at the property but also myself as a guarantor. And the LLC would also push into a business/commercial loan which raises the rate a bit and classifies it differently otherwise.

Ned Carey · Answer

@Christopher Davis in part it will depend on the lender. We are refinancing with Lima One right now. They wanted to know our credit scores but other than that it was based on the income and appraisal of the property.  Other lender may put more weight on the company income or your personal income.

As mentioned above you will likely need to personally guarantee the loan even if it is in an LLC.

Stephanie Medellin · Answer

@Christopher Davis  There's a good chance if you hold title in an LLC, the lender will still want you to personally guarantee the loan.  If you hold title in an LLC, there's also a good chance that your personal finances will NOT be a factor in qualifying, and the lender will only look at the property's cash flow.  If it's in an LLC, you won't be able to get a conventional mortgage.

There are plenty of options that don't require personal / employment income on rental properties, but they will typically look at credit score.

Cash out refi is pegged to property or owner?

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