Hi, I want to buy a property using either a HELOC or cash out refinance on my primary, then use a 401k loan to cover the rehab expenses. Once rehab is complete, I want to do a cash out refinance on the property and either pay off both the HELOC and 401k loan or at least the 401k loan. After rehab, I plan to hold and rent long term.
1. My primary LTV is 80%, will this qualify me for a HELOC or cash out refinance? If so, of the 20%, how much could I leverage?
2. What is the likelihood I will be able to do a cash out refinance post rehab and how much equity would need to remain in the rehab after all was said and done?
1)There are some credit unions and banks that off helocs to 100% cltv which is available but as Dmitriy mentions it might be leveraging more than is prudent unless if you have researched the values for this rehab property. If your comparables are off you may not be able to cash out refinance out and may be stuck with the heloc outstanding balance or the 401k loan outstanding balance.
2) The likelihood of doing a cash out depends on how you bought the property and if your personal credit income and assets qualify to do a cash out or not. To cash out:
- in under 6 months post acquisition you'll need to have purchased the property cash and it's allowed up to 70% of market value up to your acquisition cost
- 6-12 months it's allowed up to 75% based on lower of market or acquisition
- 12 + months it's based on 75% of market value
The above assumes conventional financing, you have acceptable fico scores, you have 6 months of reserves or more for your rehab, and your income is sufficient which is too much to get into on a blog response. You'll need to sit down with a loan officer who understands your objectives with investing and can chart a plan A, B,C with you so you'll have counter measures in case the first option does not work to your liking.
Cash out refinances tend to get very conservative appraisals. The appraiser generally will not "stretch," their numbers to make value similar to what might be done on residential purchase. On refinances it's usually median or mean value or less in my experience.
This is a great foundation for helping me think through this. Obviously, I'm in a situation where I'm short on cash so getting others to help me think of creative solutions is a great help. I have excellent credit and my W-2 is good but I'm also the sole breadwinner in the house. Do you have any advice for me when I am ready to pull the trigger and start searching for a loan officer?
@Dmitriy Fomichenko @Albert Bui @Ron Averill
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