cash out refinance for paid off home C5 rating

8 Replies

Hello,

I purchased an investment home in cash. My plan was after I buy it, I would immediately cash out refinance and use 70% LTV toward rehabbing the house. I would then refinance it one last time after repairs are over to get the full value of the house.

As I’m doing my first refinance, the property appraised as a C5 citing an unfinished basement (it’s a crawl space turned into a creepy dungeon!), hole in the garage roof (ok I’ll give them this), chipping paint and bad floor boards (didn’t know this mattered to C5 rating!). All these will be fixed after I rehab the house of course.


So here I am with a paid off house and I can’t seem to get the money out with traditional cash out refinance. I also have the permits for the rehab!

Purchase price in 2020 - $415k

Appraised value in 2021 - $525k

The very least I need for rehab is $250k but I will take as much as possible.

Any ideas on how I can take out money to rehab the property? I was looking into a construction loan but it sounds very strict and complicated or a hard money lender.


Advice, guidance, and your experience are welcome! Please also feel free to contact me if you are a private or hard money lender and please explain your process.

Thank you!!

Homes in poor condition can rarely be financed with a traditional conforming loan from a bank. You should ask about a HELOC on the property instead of a refinance at this stage. Refinance would come after rehab. It sounds like you over-paid or your rehab budget is over-ambitious. Focus on fixing the items on the list. Nothing fancy or high end, just correct those issues first in order to make it financeable for the next buyer.

Originally posted by @Anthony Dooley :

Homes in poor condition can rarely be financed with a traditional conforming loan from a bank. You should ask about a HELOC on the property instead of a refinance at this stage. Refinance would come after rehab. It sounds like you over-paid or your rehab budget is over-ambitious. Focus on fixing the items on the list. Nothing fancy or high end, just correct those issues first in order to make it financeable for the next buyer.

Hi Anthony,

Thanks for your reply. Sorry I meant to write that the home is now worth $525k just based on the market, not after the repairs. I thought that increase would help bridge the gap somehow and make it easier to get a refinance, but I guess not.

Originally posted by @Alex Bekeza :

@Ysabel Y. You could consider a 12 month interest only hard money loan to get significant cash out now to complete the repairs and raise condition rating.  Then you could refinance into 30 year debt. 

Hi Alex,

Thanks! How does that work with the HML? What is the process like? Do they run my credit and take my income information etc? Is the process as extensive as with a Fannie Mae/Freddie loan? Or do they take the home and place a lean on it until the terms are paid?


Thanks! 

@Ysabel Y. ..it was a good idea in retrospect, but it seems like the issues were a little more than expected. As Alex recommended, it would have likely been a better idea to get a fix/flip loan.  Yes it would have been more expensive, but it also would have allowed you the flexibility to maneuver.  The fact that you bought it cash though shows strength and if you were to get a private/hard money loan, it should be pretty easy.  I'm assuming with an aggressive budget as stated, that the property will be worth somewhere in the ballpark of $950k - 1MM+ when you're done, given the market. Pm if you need more help.  Thanks,

@Ysabel Y. No this type of loan would have zero personal income requirements. Instead it would be completely asset based. Each lender has their own LTC/ARV they're willing to allow. Your credit will need to be run because your score will dictate which pricing tier you fall into but most of these lenders don't actually report to the credit bureaus so it shouldn't shop up on your report once you have it. It's nowhere near as extensive as a Fannie loan. It's just FICO, liquid assets, appraised value, and experience. They'll want to place a lien in first position. You would pay that loan off with your future long term refi once eligible.

@Ysabel Y.

Try to do a conventional refinance (or a HELOC) at the low LTV with a different lender and see if you can get an appraisal waiver for it. Then the C5 condition wouldn't be a problem because they don't see the inside of it.

Otherwise, just get a hard money loan. You can either just get a large chunk of money upfront (easier on your life since you don't have to deal with draws) or with a holdback (which saves you some money since you're only charged interest when you use it). This seems like a pretty simple loan scenario and any HML should be able to do it with ease.

Since you already have a recent appraisal, the lender can use that and close on it in about a week. Rates should be in the 7's or low 8's since LTV is going to be low enough. Process is much easier than a Fannie/Freddie loan, and you can probably escape from having a hard pull done too, depending on the lender you go with.