Sayville, NY · Member since 2021 · 126 posts · 34 votes
Hello BiggerPockets Community. If you purchase a rental property through seller financing, is it possible to refinance the property into a conventional loan? If this is a possibility, what steps would need to be taken to refinance a seller financed property into a conventional mortgage?
@Joe Villeneuve hypothetically let’s say that I got a low down payment for a property through seller financing at 10% but the interest rate on the mortgage was 7% on a 20 year loan. I wasn’t sure if it would be possible to refinance the property into a conventional mortgage with a 30 year loan with a lower interest rate
What would the terms be on the refi loan? What are the numbers with $$$ in front...all of them. This is an unanswerable question. It's like asking ,"if I were to buy a car, and I wanted to sell it, would that be a good idea?
Sayville, NY · Member since 2021 · 126 posts · 34 votes
4y
@Joe Villeneuve hypothetically let’s say that I got a low down payment for a property through seller financing at 10% but the interest rate on the mortgage was 7% on a 20 year loan. I wasn’t sure if it would be possible to refinance the property into a conventional mortgage with a 30 year loan with a lower interest rate
@Joe Villeneuve hypothetically let’s say that I got a low down payment for a property through seller financing at 10% but the interest rate on the mortgage was 7% on a 20 year loan. I wasn’t sure if it would be possible to refinance the property into a conventional mortgage with a 30 year loan with a lower interest rate
What would the terms be on the refi loan? What are the numbers with $$$ in front...all of them. This is an unanswerable question. It's like asking ,"if I were to buy a car, and I wanted to sell it, would that be a good idea?
Sayville, NY · Member since 2021 · 126 posts · 34 votes
4y
@Joe Villeneuve Sure, let's say the property is a SFH and the seller agrees to sell the property for $120k with a 10% down payment of $12k with an interest rate of 7% on the mortgage with a 20 year note (monthly payment for the mortgage is $837/mo). Can you refinance the mortgage with the seller into a 30 year conventional mortgage through Fannie Mae or Freddie Mac while the remaining mortgage balance is $105k after 1 year of purchasing the property and the property appreciates 5% resulting in the value of the property being worth $126k) to an interest rate lower than 7% that was proposed with the seller? Such as 5% interest rate on the conventional loan?
@Joe Villeneuve Sure, let's say the property is a SFH and the seller agrees to sell the property for $120k with a 10% down payment of $12k with an interest rate of 7% on the mortgage with a 20 year note (monthly payment for the mortgage is $837/mo). Can you refinance the mortgage with the seller into a 30 year conventional mortgage through Fannie Mae or Freddie Mac while the remaining mortgage balance is $105k after 1 year of purchasing the property and the property appreciates 5% resulting in the value of the property being worth $126k) to an interest rate lower than 7% that was proposed with the seller? Such as 5% interest rate on the conventional loan?
1 - Still missing the info on the cosh flow...and I need actual numbers, not "let's say" numbers. Give me an actual deal you've been working on. You're asking the readers to give you an opinion on options you may or may not have, lacking actual information you don't as of yet have, that are critical to making that decision.
2 - Why are you paying 7% interest for 20 years for Seller Financing?
3 - The immediate answer to your assumed numbers is "no". If the property after 1 year = $126k, and the loan you need to payoff is = $105k, then you won't be able to finance enough in your refi to cover the remaining balance. At best, you could get 75% of the PV, which would only = $94.5k...not enough.
4 - The ultimate answer still lies in the remaining numbers not yet given...to calculate cash flow before and after the refi.
Sayville, NY · Member since 2021 · 126 posts · 34 votes
4y
@Joe Villeneuve I understand. The question I was asking was more of a general question if it is possible to refinance a seller financed property into a conventional mortgage with more desirable terms since I’m relatively new to Biggerpockets and Real Estate Investing.
What are terms that you’ve seen for interest rates and the length of notes through seller financed financed properties?
I’ve still yet to purchase my first rental property since I’m currently saving up for a down payment for my first property but if you are interesting in analyzing a deal that I’m interested in purchasing to determine if it’s a good deal and that the numbers work that would be greatly appreciated. Thank you for your time and the information
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Terms can be anywhere from 3% interest to 7% interest, with/without a balloon payment. 15 to 30 years.
It all depends on who the seller is, what the seller needs, what the seller's goals are with the money after the agreement, what the tax situation is for the seller, and more.
On the buyer's side, it depends on what they have available, what they need the terms to be, what their goals are both short term and long, and how these two sets of criteria, specific to that property, come together....if they do at all.
Buffalo, NY · Member since 2018 · 790 posts · 530 votes
4y
@Evan O'Brien I think Joe answered your question pretty thoroughly, but I just wanted to point out in your hypothetical situation you were factoring 5% appreciation into your ability to refinance. If you use seller financing with a balloon, I would be careful about relying on appreciation to help you attain the correct 75% LTV number.
Rental Property Investor · IL · Member since 2015 · 165 posts · 107 votes
4y
The straightforward answer to your question is yes, it is possible to refinance the property into a conventional loan with a bank. There are a few underlying factors, as others have mentioned. A seller agrees to owner financing for a variety of reasons, but one is to earn interest payments over a defined length of time. That might be the full term of 30 years, or it might be after 1, 5, 7, X... years with a balloon payment (loan payoff, i.e. you refinancing). Similar to commercial loans, a savvy seller will also specify a pre-payment penalty for an early payoff. So, for example, if you agreed to a 5 year term, but decided to refinance into a conventional loan after 3 years, there might be a pre-payment penalty of 2%. As the knowledgeable investor, you should be specifying these terms regardless.
You should run multiple scenarios to see what the property value might be after X number of years, and look at an amortization table for principal owed after that same amount of time. As others have mentioned, there may not be a scenario where you have enough equity in the property to meet a 70-75% loan-to-value without bringing in additional money to close, not without holding for a long enough period of time.
Rental Property Investor · Franklin, TN · Member since 2019 · 160 posts · 125 votes
4y
Yes, if you qualify for conventional refinance loan. If you’ve owned the property long enough & have enhanced value and cash-flow look into cash-out refinance (tax free funds for more acquisitions & reserves). If you qualify, approach existing holder of seller carry back note (hopefully there’s no pre-pay penalty). You may be surprised that sometimes seller carry back lender may not want to be paid off due to cap gains. In that instance, you may (sometimes) work with them to “walk” the note to acquire a new property in a conventional purchase or by 1031 tax-free exchange. This can be done multiple times over the years with the right seller carry back “partner”.
To actually answer your question, yes. Its just another loan/Note. If you had gotten a "regular" loan, you still would have given a mortgage and have the Note/lien recorded. Instead of coming from some big bank or lender, the docs are from a private individual.
Whether you want to or not is just up to your numbers.
One thing to take into account is the "nature" of your sellers/former owners. For you to refi or even just pay off the loan, the sellers have to produce/file a Discharge of Lien document saying they are lifting the lien. The next lender you use will need a payoff statement from them. For example, I deal I just did had seller financing and this really old lady who doesn't have access to a computer or even typewriter or fax. Add on top of that COVID, trying to get a properly/sufficiently written payoff statement AND have it notorized was a pain. It delayed our closing. So, just one of "those things" to keep in mind about seller financing. Its has its perks, but lets face it, nothing in life is free.