Can I refinance a house that I own outright?

10 Replies

I am a 24 year old guy who is close to finishing up his first deal. I bought a house at a tax foreclosure auction with the intention of fixing it up and moving in with a roommate once it is finished. I am finally getting close to the end of the “flip” part of the deal and need to find a way to get my money out of it. Do I go to a bank and get a mortgage or do I need to look for a way to refinance the property? I bought the house with cash and the only debt I have on the renovations is through personal loans.

Congrats!

You can do a "cash out refinance" and effectively "refinance" into a first mortgage.  There is typically a "seasoning" period of 6+ months of owning/living in the home before you can do that.  And the max you will be able to do is 80% of the new value of the house (depending on credit rating, it could be a lower %) and of course the rate also depends on your credit rating.  

There was an article recently on how that seasoning might be avoided by  using "deferred financing" , but you need to actually document that at the time of sale.  Seems like it would be worth learning if you repeat this process.

@Benjamin Carter cash out refi rates and requirements are also different from lender to lender, and from whether you plan to house hack the property or just turn it into a full time rental. For example, I found a local lender here who will do an 85% LTV cash out refi with no seasoning requirements, but she'll go up to 97% LTV if it's your principal residence. The most important thing you need to be aware of is the maximum cash out refi that will still allow your property to cash flow. For example, I COULD do a 97% LTV on my current BRRRR, but I WONT because it will only cash flow @ 75% LTV. I'll use a HELOC to snag the rest of the equity in the property after refi.

Long story long, call a minimum of a dozen local/national lenders and get some rates! I know people who called over 50 before they found the right lender for their situation. 

Originally posted by @Benjamin Carter :

 Do I go to a bank and get a mortgage or do I need to look for a way to refinance the property? I bought the house with cash and the only debt I have on the renovations is through personal loans.

 Yup it's just a refinance. And, yes, it's called a "re"finance even if there was no original mortgage. 

@Matt Hurley okay that's good news. I actually bought the property for such a low price ($8000!) that whatever LTV I was able to snag from the bank I would be able to get a really high return. I do plan on making it my principal residence as soon as it is finished and my roommate will be paying most if not all of the mortgage for me. With all said and done I couldn't have asked for a better first deal!

As all the other have mentioned, shop different lenders because they all have different requirements. Some require seasoning and they all have different Loan To Value (LTV) ammounts they will approve. The Home Equity Line Of Credit (HELOC) might be a good fit for you. That basically gives you a line of credit against the house and you only pay if you are currently borrowing money from it. So if you are not quite ready for a deal you are paying zero interest but you have that tool at your disposal should you need the money quickly. I would coution you though that HELOCs usually have a variable interest rate and due to the change in tax laws you might not be able to write off the interest from the HELOC unless you used the funds to make repairs/upgrades to your primary residence. Every situation will be different and you just have to figure out what works best for your situation. Good luck!

@Benjamin Carter

I would recommend a cash out refinance after the 6 month mark. It will go on current appraised value without the limitations of delayed financing - that have s ceiling amount of what you paid for the property - $8k and you won’t find a lender willing to do a mortgage for that low. 

You can start the process prior to 6 months and close the day after 6 months. Make sure you keep records of all the improvements you made to show the appraiser how much you forced appreciation on the property. 

@Jerry Padilla do you know if that ceiling of what I paid still applies when I bought the property from the county treasurer as a tax foreclosure? If that is true then I would be better off just flipping the property for double what I have invested in it rather than using it as my primary residence.....

That ceiling that @Jerry Padilla mentioned only applies to the deferred financing option.  Something I mentioned only because it might be something that would apply to you in a future deal, and not on this property.  The ceiling on a regular refi is whatever the max % the lender will give based on the current value.  The others here have given  you the info on how much this can vary, my original response should of be couched with "typically".  But you should be good to go if you follow all the advise here on documentation, shopping around, and being mindful of your cash flow.  One other thing, they won't just give you a loan of x%(let's use 80%) of "whatever" it appraises to.  They can lower the amount if the appraisal comes in lower, but they won't automatically give you more if the house appraises higher. So when you apply, try to have a good idea of what it likely will appraise for, and apply to take it to 80%(or whatever) of that value.  They basically treat it like you are trying to "buy" the  house from yourself, from a paperwork perspective.