Property Value / Delayed Financing Exemption / Cash Out Refi

8 Replies

I've read Fannie Mae guideline on this, but am recently confused after speaking with a few lenders. According to the DFE on Cash Out Refi, if a property is purchased in cash;

1.) 6 month seasoning period is not required

2.) 75% LTV or lower is applicable

3.) Value in LTV is based on appraised value

4.) Total cannot exceed purchase plus closing costs

Both lenders I spoke with today are clear on 1 & 2 but when it comes to 3 they're are doing whichever is lower of appraisal and purchase price. I dont see this on the Fannie Mae guideline- anyone else dealing with this or know why they are doing it this way?

@Edit B. you are correct about #3 in your post. Sorry I can’t shed some light as to why that is. But here is something I learned from @Andrew Postell and if my inspection goes as planned on a duplex I have an accepted offfer I will be executing the following strategy. This strategy here eliminates #3 in your post. Here is what Andrew wrote on another post:

HOW TO PROPERLY STRUCTURE BUYING A HOME WITH CASH

Create an LLC and have the LLC lend you a mortgage on the property you arereceiving.The reason why this works is because instead of you needing cash or receiving a cash out loan, we are now refinancing a loan – your loan. There no reason to wait any time or have any "whichever is lower" rule come into play. We are just refinancing a loan. Here's how it works:You create an LLC. You buy a home. Your LLC gives you a loan for the home. You file the deed for that loan at the county courthouse. You use the money from the LLC to buy and fix up the property. Once the property is completed, your conventional lender comes to refinance the loan. Your conventional lender runs title and sees there is a loan.Your conventional lender refinances you into a new loan, and cuts a check to your LLC in the amount of 75% of the value. Please don't confuse this 75% with a "cash out" amount. The non-cash out LTV on a refinance is also 75%. We are refinancing a mortgage. Your LLC's mortgage. Essentially your LLC has become the bank/hard money lender/etc. However you want to think about it. You get to set the interest rate (it can be 0%) and you get your investment amount back sooner. Some things to think of: To file a deed at the county courthouse is $100-$150 in cost (depending on which county)And you want that note to be pretty close to 70% of the ARV for the property if you don't want to bring any money to closing. 70% will allow you to roll in your closing costs. If you want it to be at 75% just keep in mind you would need to bring your closing costs out of your pocket to complete the refinance.

@Edit B. Yeah, these rules are super confusing.  That's why I wrote my original post found HERE That post is only for cash buyers, but it sounds like that's exactly what you are inquiring about.  Section 1 and 2 speak about the restrictions while section 3 is probably the area you should reference.  If you have any questions on it feel free to ask.  Thanks!

@Andrew Postell I have one beef with your strategy- When you lend yourself the money from the LLC you obtain a regular mortgage and purchase this property. So you're effectively in the same situation as anyone who purchases on a conventional. But if that's the case you are then obligated to wait 6 month seasoning before refinancing.. So how do you get around that?

Also, I still don't understand where they are getting "the lowest of the two" (appraisal or purchase price) from. I don't see this wording anywhere in the Fannie Mae guide

@Jorge Ruiz & @Andrew Postell - I looked into this a bit. It looks like many banks dont have 6 month seasoning for regular refinance, only on cash out refinance. 

My only concern with this at this point is how will the underwriters act when they find out that this is a loan on from an LLC under your own name and that cash will essentially go to your LLC. Are they not able to easily sniff this out, if they are do they not care about it?

@Edit B you are correct.  No seasoning requirement from Fannie/Freddie on refinancing.  The banks are allowed to have an "overlay" saying that they do need you to be on title, but if the bank does have the rule, then go to another bank.

And the guidelines address this strategy very specifically.  If you have an ownership interest in the company you can only refinance 80% of the value.  For everyone else, it's 85%.  So you refinance a lower figure....but it's better than 75% and it's quicker than the 6 month thing.   So it all works out in your favor.  

As far as the Fannie Mae guidelines...is over 1200 pages so it's easy to be confused.  And they put the verbiage so lenders know what it means.  The section you should reference is B2-1.2-03, Cash-Out Refinance Transactions, under the "Delayed Financing Exception" section of that chapter.  The specific verbiage reads:

The new loan amount can be no more than the actual documented amount of the borrower's initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points on the new mortgage loan (subject to the maximum LTV, CLTV, and HCLTV ratios for the cash-out transaction based on the current appraised value).

Since the maximum LTV is 75% of the appraised value for a cash out loan, that's where they get the "lower of the two" values from.  It's either purchase price + closing costs, or 75% of the appraised value....whichever is lower.

Hope this isn't too confusing but let me know if you have any other questions.  Thanks!

@Andrew Postell can this potentially be done after a purchase in cash and deed being recorded. Where you would go in and refi after the purchase, adding the LLCs lien on the deed?   Also, do you know many people implementing this strategy in practice and how that is working out for them?

Also, to add, how do you go about doing this, would you recommend telling them upfront? Do they usually find out that the LLC is under your name otherwise.

@Edit B. sure, you can file the lien on the deed after purchase.  Seen it done many times.  And while not many people have the cash just laying around to do this, the ones that do are using it effectively.  

I feel with banks the more investor terminology we use the more they get confused. Just try telling a bank you are using the "BRRR method" on a "house hack" that you got "sub to"....they will have no idea what you are talking about....and even though all that is fine they will probably just say no to you because they don't understand what is going on. Just tell them that you are refinancing a loan. Keep it simple for them.