Hello Everyone, So I've just learned about the cash out refinance option while perusing bigger pockets forums, but I don't understand why you would want to do it. Using the following scenario I was hoping someone could explain it. Home A has an ARV of $150,000 after looking at MLS and comps I feel comfy at that number. I've got the property under contract and using a private investor secure the $65,000 I need, with $45,000 going into the home, and $20,000 into repairs. Therefore I have no initial mortgage on the property. Let's assume I held the property for a year with a tenant on a twelve month lease after renovations were completed. Now everything is all said and done, and I want to do a cash out refinance, and I have two options. A) Traditional bank that I was lucky enough to find who will do 80% LTV. ($120,000) B) Fannie Mae DFE who will do "The loan amount will be limited to the lesser of: (a) 70-75% of ARV and (b) your original purchase price plus total closing costs and prepaids on the new loan." (45,000+3,000 closing+1,200=$49,200) This leaves me with two questions: 1) Why would anybody go with B and only take out $49,200? At best you pay back the investor the purchase price but are still in the hole for renovation costs. This leaves you with a cash flow but a debt of $20,000 on the property. Doesn't sound like a cash out! 2)In option two if you take $120,000 and pay your investor back his $65,000 and say an additional 20% of profit on $120,000-$65,000($55,000) giving him $11,000 of that and leaving you with $45,000. Now you have $45,000 in cash, but you're $120,000 in the hole on the loan you just took from the bank, and a property with a mortgage on it now that you're required to make payments on. Why would you do this? It'll be on your credit now and weigh you down on future loan requests, will it not? The only scenario I have is to get a chunk of change and just rent out the property to cover mortgage and expenses. Any and all help is always appreciated. Best Regards, Jason Eyerly

This statement is the gist of it, but there is something in the above quote that requires correction. You do not transfer ALL risks to the lender; you transfer the risk of interest rate increases and the risk of property value decline, but you don't transfer liability risks to the lender (that's why you'll carry insurance, but then you have the risks associated with coverage levels and deductibles).

Ahh I think I got what you're trying to say it is different how rental income is calculated when the subject property is owner occupied or non owner occupied, explanation below. To clarify: For rental income on a Non owner occupied property (which I believe this is) right 800 income - 800 liability is $0 to make the borrower qualify for and you divided it by 0 because he has no other income so the ratios are 0/0 if gross rent was 1066.67. The 800 Income after being discounted by 25% is netted against the 800 PITIA = 0 effect plus or minus to the borrowers scenario. For rental income on a primary residence: What your implying is how rental income is calculated if the subject property is a primary residence then yes it would go as you had mentioned because the guidelines do not allow the borrower to net the income against the monthly obligation so income would go in the income category and PITIA would go into the expense category similar to what you mentioned 800 / 800 = 100 DTI (debt to income ratio). He would not qualify in this case. He would need more income or to lower the expenses to get the ratios to be atleast 45-50% DTI max depending on assets/credit.

LOL, another detail, having liquid assets in excess of the loan does have a bearing, it's what we in lending call a compensating factor. Your income from investing will be considered from your tax return. A subject property income can be considered, you will need to be seen as having RE experience, if you're buying your first rental they generally won't consider income from a residential property even as a commercial loan as they consider management and experience. You can usually get a loan when you can show you don't need it. :) Chris, ratios take living expenses into consideration, you'll need to look at the Fannie underwriting guidelines, not borrower information. Ratios are taken from verified data, over that from the 1031 and will be on worksheets in the file. Qualification is based on the front ration, housing expense and the back ratio housing with all other obligations outstanding with 6 months or more remaining to be paid. :)

you can fund in a revocable living trust and real names only (live persons names) with respect to agency financing Fannie Freddie ginnie govt agency's. I have a lot of investors who take their properties out and while some who are uncomfortable with that momentary exposure will utilize portfolio financing each person will have to find their own comfort zone between the pros and cons of each product.

What is the point of Cash Out Refinancing?

Jason Eyerly

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Real Estate Agent · Charleston, SC · Member since 2013 · 424 posts · 99 votes

What is the point of Cash Out Refinancing?

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"What is the point of Cash Out Refinancing?"