BRRRR and Seasoning Period

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BRRRR and Seasoning Period

Tyler Wehrung
Rental Property Investor · Hamilton, OH · Member since 2016 · 59 posts · 30 votes

Hello BP!

I have an accepted offer on my first property that I am purchasing with all cash. My strategy was to purchase with cash, rehab, rent, refinance. I just recently learned about the "seasoning" period which from what I've read can vary between six months to a year. Within this period you can only refinance for the current value of property or the sale price - whichever is lower (I would hope the latter is always true and in my case it is) and this is called delayed financing. I've heard/read a lot about BRRR, but I've not heard anyone mention this seasoning period before. I'm wondering if there is a way around it or if its just something you have to accept, wait it out, then continue on? If that is the case, I'm thinking about the delayed financing option to at least get 80% of my money back to put in other deals so I'm not sitting on the sidelines for a year. I'm interested to hear thoughts from you more experienced investors. If you need any additional details, feel free to ask. Any info is greatly appreciated!

Thanks in advance,

Tyler

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Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
9y

@Brent Coombs oh, good catch. That link is referring to cash out loans when you own the property and you had it up for sale yourself.  This rule doesn't apply if you are doing a "rate/term" refinance.  This also doesn't apply if the previous owner had it up for sale and you bought it from them.  I know, it's not very clear on this explanation but the "up for sale" thing is only if the borrower (you) has the home listed for sale under his/her name.  And this only applies to cash out refinances.  Hope this helps.

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  • Stephen Leonard
    Flipper/Investor/Realtor · Gretna, LA · Member since 2014 · 85 posts · 40 votes
    9y

    @Tyler Wehrung I would shop around for another lender.  Here in the New Orleans area, there are many banks that have seasoning. But there are a few smaller local or regional banks that will overlook seasoning.  But they have other stipulations. Such as investment property (buy n hold) need to be renovated and rented. Which I have done. Then i'm able to turn around and refi right away. 

    So first I would check around to a few other banks.  Not being a lender, it might be a regional thing that every bank in your area requires seasoning??  But I would think your refi should allow you to pull out your renovation cost and don't forget to add something for your time/cost which is added value. 

    So you 80% value with your cost or time added may end up being 90% instead. 

    Good luck and 

    Happy Investing 2017

    Stephen Leonard

    1Reply
  • Christopher Phillips
    Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes
    9y

    @Tyler Wehrung

    The old guidelines said 6 months for delayed financing and Fannie Mae.

    That is no longer the case. You can refinancing within 24 months of closing now.

    But, with all things related to guidelines, some lenders are still sticking to 6 months. So, you have to shop around and find someone that is willing to do it sooner.

    0Reply
  • Tyler Wehrung
    OP
    Rental Property Investor · Hamilton, OH · Member since 2016 · 59 posts · 30 votes
    9y

    Great! Thank you!

    0Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    9y

    @Tyler Wehrung there are certainly a lot of different stories attached to financing and what you are describing is no exception.  The "seasoning" requirement is an "overlay".  Overlays are the extra rules lenders put on the Fannie Mae/Freddie Mac guidelines.  it sounds strange but banks put these overlays on loans to lend less money.  They call it "managing risk".  So just find a lender with no overlays and you will be good.  

    One very important item to keep in mind when buying with cash and seeking to do a cash out loan in the first 6 months is that you will be limited to 75% of the After Repair Value OR purchase price + closing costs....whichever is LOWER. So, if you buy a home with cash for $100,000 and that home appraises for $100,000 then you can get $75,000 back. Or if you buy a home for $100,000, put $20,000 in it and it appraises for $150,000, then you can only get back $100,000 + initial closing costs of when you purchased. After the first 6 months you can then get the full 75% of the ARV. Don't confuse this with a seasoning issue though. This is a "Cash Out" rule that every bank will have because it is a Fannie/Freddie rule.

    If it makes any difference, you purchase an investment property with 15% down or 20% down if you want to.  So if you are looking to leverage your money more, and the property scenario allows you to get a loan, you can get an 85% loan if you purchase.  The moment you refinance conventional terms are 75% "Loan-to-Value".

    Hope this helps.  Thanks!

    1Reply
  • Tyler Wehrung
    OP
    Rental Property Investor · Hamilton, OH · Member since 2016 · 59 posts · 30 votes
    9y

    Thanks for clarifying the difference @Andrew Postell! Great tips!

    0Reply
  • Brandon Clark
    Real Estate Investor · New Orleans, LA · Member since 2016 · 95 posts · 5 votes
    9y
    Hey Stephen Leonard, would you mind sharing what banks you know would refinance a rental without the 12 month seasoning period? My money is tied up and I'm in the need of one now. Thanks in advance
    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    @Tyler Wehrung, when applying for a "Delayed Finance Exception" after paying all cash, if 70% of its (immediate) appraisal is at least equal to the price you paid for it, then you'd get ALL your purchase price back, straight away! But as @Andrew Postell pointed out, if the only reason it appraises so high is because of EXTRA money you spent on it after purchase, then THAT'S the portion you wouldn't get back before the (usual) seasoning. 

    One (not easy) trick is: buying it in ARV condition already - for less than 70% ARV! Boom! Cheers...

    0Reply
  • Tyler Wehrung
    OP
    Rental Property Investor · Hamilton, OH · Member since 2016 · 59 posts · 30 votes
    9y

    Thanks @Brent Coombs! From everything I've read, you can get 70% of immediate appraisal OR purchase price, which ever is lower. I will definitely look into this further.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y
    Originally posted by @Tyler Wehrung:

    Thanks @Brent Coombs! From everything I've read, you can get 70% of immediate appraisal OR purchase price, which ever is lower. I will definitely look into this further.

    I always find it clearer when explained this way: "you can get 70% of immediate appraisal, or, 100% of the purchase price, which ever is lower"! Get the difference? eg. You buy for $100k; it appraises at $150k (70% = $105k), therefore they'd lend the full $100k (but not $105k)! Cheers...

    0Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    9y

    @Brent Coombs & @Tyler Wehrung the conventional rule here is 75% or purchase price on a Single Family Home and 70% on a 2-4 unit property. A bank could have an overlay restricting you to 70% but there are banks that will lend 75% on a SFR on a delayed financing deal.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y
    Originally posted by @Andrew Postell:

    @Brent Coombs & @Tyler Wehrung the conventional rule here is 75% or purchase price on a Single Family Home and 70% on a 2-4 unit property. A bank could have an overlay restricting you to 70% but there are banks that will lend 75% on a SFR on a delayed financing deal.

    Regarding cash out Refis, I don't see any differentiation between SFR's and 2-4 unit properties mentioned in this page of the official Fannie Mae (70% ONLY) website. Did I miss something?:- https://www.fanniemae.com/content/guide/selling/b2...

    It looks to me like the 1 vs 2-4 differentiation, and the "75% conventional rule" (rather than 70%) you mentioned, would be both overlays by individual BANKS, rather Fannie Mae rules?

    ie. the reverse/opposite of what you were suggesting? Cheers...

    0Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    9y

    @Brent Coombs that link is 6 months old (6/28/2016), and in the lending world that's a long time ago, in a galaxy far, far away. The rule is 75% LTV for SFR and 70% for 2-4 units.

    If you do want to self-research this stuff use this link: 

    Fannie Mae Selling Guide

    The click on "selling Guide - January 31, 2017 updated" on the left hand side. You can then hit "control F" to open a search window and search for the "eligibility matrix". There you will see all the LTV's for all the property types.

    I would offer caution on doing the self research approach.  Not telling you what to do but just offering caution.  As you just saw, what you were using was old and it caused you to have the wrong information.  These rules change all the time (it just changed 9 days ago) and the Fannie Mae Selling Guide is only 1/2 of the loans available for conventional loans - you then have Freddie Mac loans too.  Knowing these rules is a full time job.  If this really is your passion let me know and I can get you an interview with a really great company in your neck of the woods, lol.  Hope this helps!

    2Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    @Andrew Postell, aah, BUT, under the Fannie Mae guidelines under the question: "Can borrowers get cash out from homes they purchased three month..." (ie. the topic of this thread), the link it gives ("Published January 31, 2017") STILL says:- ..."Properties listed for sale in the six months preceding the disbursement date of the new mortgage loan are limited to 70% LTV, CLTV, and HCLTV ratios (or less if mandated by the specific product, occupancy, or property type – for example, 65% for manufactured homes)"... https://www.fanniemae.com/content/guide/selling/b2...

    Is the higher 75% LTV ratios that you mentioned only referring to SEASONED (SFR) refis?

    (Or, should the Fannie Mae website be written CLEARER to avoid ambiguity?)

    Or, am I still missing some connection between the Delayed Financing Exception, which ONLY allows 70% LTV (or up to 100% purchase price; whichever is lower) and the higher 75% LTV for SFR investments mentioned elsewhere on their Site?...

    0Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    9y

    @Brent Coombs oh, good catch. That link is referring to cash out loans when you own the property and you had it up for sale yourself.  This rule doesn't apply if you are doing a "rate/term" refinance.  This also doesn't apply if the previous owner had it up for sale and you bought it from them.  I know, it's not very clear on this explanation but the "up for sale" thing is only if the borrower (you) has the home listed for sale under his/her name.  And this only applies to cash out refinances.  Hope this helps.

    2Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    @Andrew Postell, is it odd that I've never seen the "Delayed Financing Exception" mentioned on BP in relation to Fannie Mae's "SELLING guide", but ALWAYS in the context of BRRRR instead?

    Either way, I agree that a "rate/term RE-finance" doesn't apply - it's: (delayed) FINANCE!...

    1Reply
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