Can you use a HML for rehab while getting a traditional mortgage?

Creative Real Estate Financing
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Can you use a HML for rehab while getting a traditional mortgage?

Tom Kuhen
Contractor · Cleveland, OH · Member since 2016 · 56 posts · 19 votes

I've been trying to find creative ways to finance a deal that I am analyzing and haven't been able to find an answer to this question: Can I use a HML to cover the rehab. costs of a flip and down payment on a house, while taking out a traditional mortgage on the property? I am relatively new to RE and asking this question may show that. I asked another newer investor the same question, and the only thing that would be a concern is that the bank may not approve because it's not technically my money.

Example:

A house is listed for 60k, I put 30k into the rehab., and sell it for 130k. Instead of having the HML fund the 90k and paying the costs for however long (2-6 months), could I get a mortgage on the property, and use the HML to cover a 20%(or less) down payment as well as the rehab. costs? Then I would be only borrowing 42k and then paying the mortgage which would probably be a lower payment than the HML.

Are there any advantages to doing this (if it's even possible) / are there any disadvantages?

I may be missing something completely, and if I am, please don't hesitate to point it out.

Thank you,

Tom Kuhen

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Luis Roel
Lender · Jersey City, NJ · Member since 2016 · 68 posts · 24 votes
10y

Refi would go like this:

1. HML first (10-25% down max 15% interest, usually in the 9-12% interest range), purchase the property, do the rehab. Now the market value of the property is higher, this is known as the ARV (After Repair Value)

Now you have three choices, you either:

A. Sell the house once rehab is finished, pay off the HML. What's left over is your profit.

B. Refinance into a conventional mortgage (Variable down, Interest rates up to 10%, harder to qualify for, lots of red tape) for a percentage of the ARV, the difference between the total cost for the HML and the dollar amount that percentage represents is what you get back in cash. You can then use that money to start the process over again on another property or just pocket it. The plus is your payments have gone lower. The con is you essentially now owe more than you did originally, however. If you rent it out and the mortgage payment is less than the monthly rent income then you have positive cash-flow. Also referred to as a "cash out refinance".

C. Refinance the house only for the amount for which you owe the HML lender. Payback the HML, rent out the property and make sure rent is higher than the monthly payment on the loan. You do this so that it lowers your monthly payments and allows you to improve cash flow on the property. This is a normal refi.

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  • Luis Roel
    Lender · Jersey City, NJ · Member since 2016 · 68 posts · 24 votes
    10y

    Hey Tom!

    Usually with an HML, the money is given directly to the title company and rehab funds function on a draw. Most people get an HML first and then refi into a conventional mortgage. Also, most hml lenders require a first lien position which would be occupied by your mortgage lender so that will also be a problem.

    Let me know if there is any way I can help!

    1Reply
  • Tom Kuhen
    OP
    Contractor · Cleveland, OH · Member since 2016 · 56 posts · 19 votes
    10y

    @Luis Roel I understand now, thank you for making that clear for me. That strikes up another question you may be able to answer for me. I'm only semi-familiar with refinancing, so could you touch on that a bit? My understanding is that you essentially renew your mortgage for hopefully a lower rate/ payment, and pull out a percentage against the value of the home (example: 70% LTV) but does that start the timeline of the mortgage over again? Once again, I may be off on that thought process, but I don't know what the advantages/disadvantages are.

    Thank you for your already informative post,

    Tom Kuhen

    0Reply
  • Jeff CopelandBusiness Member
    Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
    10y

    First of all, most hard money lenders are not going to lend you 100% of the purchase and rehab cost - they expect you to have skin in the game and put about 20% down. 

    Secondly, banks generally will not lend on a home that is in need of serious rehab. Depending on the type of loan (conventional versus FHA), they have very specific requirements for the condition of the property - from the age of the roof to the condition of the paint.

    Thirdly, as noted above, the mortgage and/or HML will show up on a lien search, and neither lender is going to accept being in a second position lien behind the other.

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  • Luis Roel
    Lender · Jersey City, NJ · Member since 2016 · 68 posts · 24 votes
    10y

    Refi would go like this:

    1. HML first (10-25% down max 15% interest, usually in the 9-12% interest range), purchase the property, do the rehab. Now the market value of the property is higher, this is known as the ARV (After Repair Value)

    Now you have three choices, you either:

    A. Sell the house once rehab is finished, pay off the HML. What's left over is your profit.

    B. Refinance into a conventional mortgage (Variable down, Interest rates up to 10%, harder to qualify for, lots of red tape) for a percentage of the ARV, the difference between the total cost for the HML and the dollar amount that percentage represents is what you get back in cash. You can then use that money to start the process over again on another property or just pocket it. The plus is your payments have gone lower. The con is you essentially now owe more than you did originally, however. If you rent it out and the mortgage payment is less than the monthly rent income then you have positive cash-flow. Also referred to as a "cash out refinance".

    C. Refinance the house only for the amount for which you owe the HML lender. Payback the HML, rent out the property and make sure rent is higher than the monthly payment on the loan. You do this so that it lowers your monthly payments and allows you to improve cash flow on the property. This is a normal refi.

    2Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    10y

    It appears to me that you are asking how you can get 100% financing. If that is true, you can but lenders who do this typically only do it with a rehabber with experience and a good track record. The loan is typically a first and a second with the second holding a profit share piece. Doing this 100% financing eats up a lot of any profit and if you have no experience, you would have to contract a home run or even a grand slam deal for anyone to want to do it.

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  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    I agree with @Jeff Copeland

    Skin in the game. As a private lender myself, I require the investor to have SOME cash involved. As time progresses, and with a few deals between myself and a borrower, I may relax my guidelines somewhat. Nobody wants to lose money..the investor, the lender. My suggestion is to raise some cash for the rehab such as selling stocks, bonds, etc or maybe partnering on a deal if that is possible. 

    1Reply
  • Luis Roel
    Lender · Jersey City, NJ · Member since 2016 · 68 posts · 24 votes
    10y

    There are creative ways around this. 

    0Reply
  • Tom Kuhen
    OP
    Contractor · Cleveland, OH · Member since 2016 · 56 posts · 19 votes
    10y

    Thank you all for responding and clearing this up, I've shown openly shown my ignorance on the topic, and appreciate the help.

    @Jeff Copeland Thank you for responding. Your third point was the biggest concern in what I was asking, and it makes complete sense that they wouldn't want to be a secondary lien.

    @Luis Roel Thank you for the insight, I now have a better understanding on that subject. I'm sure you're right about getting creative, and that's what I'm looking more into.

    @Will Barnard If I found a lender / JV partner who provided 100% funding for this deal, I would have no problem at all splitting the profit in their favor, especially since this would be my first project. I'd like to just get started already, and splitting the tail-end 60/40, 70/30 or however it would be, really isn't troublesome for me.

    @John Thedford I've heard that quite a bit, to no surprise. Thank you for the help, especially being a private lender. If you don't mind, just so I have somehat of an idea, what are some of your common terms / requirements for lending?

    0Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    @Tom Kuhen

    Tom: I am not your guy. I only lend in Florida. Shop around for lenders. DON'T pay the scammers up front fees. If the only up front fee is an appraisal that is fine. Don't pay the ones that one 1K, 2K, 3K up front. Many take your money and then say no. The may write just enough loans to not get in trouble, but aren't really concerned with helping people. Good luck.

    1Reply
  • Tom Kuhen
    OP
    Contractor · Cleveland, OH · Member since 2016 · 56 posts · 19 votes
    10y

    I was strictly asking for your guidelines to get a better understanding of what some private lenders are asking for. I know some common HML terms, but wasn't sure if private lenders commonly require points / percentage of interest similar to theirs. I know private lenders can choose to be a bit more flexible, but that's why I asked what you personally look for. @John Thedford

    0Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    10y

    Most HML will want to be in first position and a bank won't take a second position. This would be tricky to be able to do. HML also won't fund properties unless they are for investment purposes and this usually knocks the primary residence out of the equation.

    1Reply
  • Tom Kuhen
    OP
    Contractor · Cleveland, OH · Member since 2016 · 56 posts · 19 votes
    10y
    Simply put. Thank you Ian Walsh !
    0Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    @Tom Kuhen

    Rates are over the place. Most HML won't be less than 10% and many are higher. Good luck

    0Reply
  • Leo Hefner
    La Mesa, CA · Member since 2015 · 12 posts · 13 votes
    10y

    As a mortgage guy and private lender, If @Luis Roel cannot 100% finance you, then you will need to do the purchase loan with seasoned money out of your or your partners pocket then find the HML to finance the rehab and be in second position. But be prepared to take share in the profits with the HML. I wish you the best of luck and success!!

    1Reply
  • Tom Kuhen
    OP
    Contractor · Cleveland, OH · Member since 2016 · 56 posts · 19 votes
    10y

    Thank you @Leo Hefner for the tips, and thanks for the luck, I'll need it!

    1Reply
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