Refinance a conventional loan into commercial?

Question

So I haven’t seen too many questions about this. Has anyone ever refinance a conventional loan into a commercial? Buy a house as primary residence then refinance into commercial loan under an LLC. Can it be done? What are the pros and Cons?

Alex Deacon · Answer

@Sanise Hass I am not sure how different Philly is from Pittsburgh but if you do that here you will have to pay transfer tax because you are basically selling the property to another entity. You will also experience a little higher interest rate and most like an amortization schedule of 20 years. Its absolutely possible to do and would be smart if you are looking to protect other assets.

Kevin Romines · Answer

If you buy as an Owner Occupied then you must agree to live there as your primary residence for 1 year prior to making it a rental, if you don't owner occupy it for 1 year, you have just committed loan fraud and if the lender becomes aware of this, they may report it to legal authorities?

However if you do owner occupy it and before the year is up, you choose to refinance it as a non-owner occupied, you can legally do that, however, you must live in the house during the time you hold the owner occupied loan.

The issue I see with this is that you most likely wont have the equity needed to refinance it as non-owner occupied, as the LTV on those are lower, generally a max. of 75-85%. So you would have to had to either gotten a really good deal or had put down a large down payment or you rehabbed the property to force appreciation?

I hope this helps?

Kyle Altenau · Answer

Hi Sanise,

I've been investing in Real Estate for a few years now and am actually doing this for the first time right now. I know it's kind of backwards to invest in properties than further down the line "house hack" but that's just how circumstances played out for me with my current home.

As far as I am aware (and I'm not a lawyer) you'd be in default on most mortgages if you went in as a primary residence, then converted to investment property. If you continue to pay your mortgage on time and there's no issues, it most likely wouldn't be an issue, but it is a risk factor to keep in mind. I guess that would be the main con, that and the lack of liability protection you get from owning it in an LLC.

The pros are that it would no longer show up on your personal credit and debt to income calculations for other credit purposes. Lending parameters aren't as good, but in this environment there are still attractive options available. Banks are a little overloaded with refinance requests from my experience (mostly working in NY, NJ, PA) so without previous relationships it may take a little while. Just try and be patient.