Seasoning periods for Refinance?

[Isaiah Thelwell]

Hello, i've been hearing different investors talk about a seasoning period when refinancing out of hard money during the BRRRR process. can anyone help me dive a little deeper on what this is/mean?

[Timothy Howdeshell]

When you get a loan that is recorded as a mortgage, a lender will want that money to "season". 

Basically you can't (or rather the lenders won't) do a cash-out refinance before the seasoning period (6 months typically; I've heard some are pushing 12 months now). These guidelines are set by Fanny/Freddy. Most mortgage originators sell their mortgages to Fanny/Freddy and so follow their guidelines. 

The reason for this is to prevent people from getting a good deal, immediately refinancing, pulling all of their cash out, and having no "skin in the game". Also I think there is some financial penalty for the mortgage originator if their loan is refinanced before 6 months, but am not certain about that. 

In a BRRRR you need to refinance to pull out your cash outlay and repeat the process.

[Devin Peterson]

Quote from @Timothy Howdeshell:

When you get a loan that is recorded as a mortgage, a lender will want that money to "season". 

Basically you can't (or rather the lenders won't) do a cash-out refinance before the seasoning period (6 months typically; I've heard some are pushing 12 months now). These guidelines are set by Fanny/Freddy. Most mortgage originators sell their mortgages to Fanny/Freddy and so follow their guidelines. 

The reason for this is to prevent people from getting a good deal, immediately refinancing, pulling all of their cash out, and having no "skin in the game". Also I think there is some financial penalty for the mortgage originator if their loan is refinanced before 6 months, but am not certain about that. 

In a BRRRR you need to refinance to pull out your cash outlay and repeat the process.

 Good tip on the conventional guidelines. However, @Isaiah Thelwell I think you are looking for DSCR guidelines. Some lenders out there have 3 month seasoning, most have 6. Again, the same seasoning rules apply you must gold the note in place for at least that amount of time to avoid fees for early note sales.

[John Chong]

The main reason for a seasoning period is to be able to use the new appraised ARV value. If its between 3-6 months you'll get 70% LTV and 6+ months will get you 75% LTV.

This is only for a cash out refi. There's no seasoning period for a rate-term refi. 

There's also no seasoning period if you purchase with cash and looking to refi on the purchase price + rehab amount.

[Robin Simon]

Quote from @Isaiah Thelwell:

Hello, i've been hearing different investors talk about a seasoning period when refinancing out of hard money during the BRRRR process. can anyone help me dive a little deeper on what this is/mean?

Yes - seasoning refers to the ownership period (in months) between the purchase and the refinance. Check out this recent BP article on BRRRR seasoning that dives exactly into your question!

https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...

Refinancing: Conventional or Portfolio Lenders vs. DSCR

There are multiple considerations to optimize the refinancing portion of the BRRRR method. Generally, for the optimal refinance, these are top of mind for BRRRR strategy investors:

• Return of capital: The key "secret sauce" of the BRRRR method is to build portfolios using the same capital over and over—which relies on getting your basis (or more) back on the refinance, where basis refers to the money you invested in the property (down payment and cash used for renovations).
• Speed: Refinance lenders use the term “seasoning” to refer to the amount of time (typically in months) between the purchase of the property and the refinance. Velocity of money, or speed in which you can complete a BRRRR investment and repeat, is key to success, and refinancing with the shortest seasoning requirements is highly important.
• Loan terms and interest: Cash flow is also an important consideration for a refinanced rental property, so attaining a low interest rate, as well as other aspects of loan structure (term, amortization, or interest only, etc.), plays a big role.

Generally, there are three main refinance options for BRRRR method investors:

• Conventional loans
• Bank/credit union loans
• DSCR loans

Conventional loans are generally defined as loans originated under GSE (Fannie Mae/Freddie Mac) rules and guidelines and securitized. Bank and credit union loans are generally defined as “portfolio lenders,” or lenders that hold the loans on their balance sheets. DSCR loans are loans issued by private lenders with proprietary and differentiated rules and guidelines and are typically included in “non-QM” securitizations.

The advantage of conventional refinance loans is that they typically have the lowest interest rates and fees. However, BRRRR method investors have run into a lot of trouble using conventional loans for refinances for multiple reasons, especially in 2023.

One issue is the challenge of qualifying, as conventional loans will have DTI requirements, income requirements, loan size limits, and loan amount limits that investors looking to scale a portfolio run into as soon as the financial freedom snowball starts rolling. But most importantly, in April 2023, Fannie Mae changed cash-out refinance seasoning requirements from six months to a full year. This is hugely problematic for the "speed" aspect of BRRRR investing—drastically slowing down the returns and velocity of capital for BRRRR investors using conventional loans.

Portfolio lenders are another option, and they typically offer competitive rates and fees as well. Banks and credit unions can also offer flexibility for investors that engage in strong relationship-building strategies, offering discounts and solid loans in exchange for borrowers willing to use the institution for other purposes (savings accounts, etc.). However, downsides include regulatory restrictions on bank lending, many institutions that restrict concentration and geographies, and other headaches and issues that arise when dealing with a slower-moving bank.

DSCR loans are the option that has completely changed the BRRRR lending landscape in the last few years. While DSCR loans tend to have interest rates a bit higher (generally 0.75% to 1%) than the other two options, which can challenge cash flow, this comes with some advantages that are uniquely suited to the BRRRR method. These advantages of using DSCR loans for refinances using the BRRRR method include:

• More flexible seasoning requirements: As of April 2023, the seasoning requirements for conventional cash-out refinances is now 12 months, but many DSCR lenders are still at just six months (with some even as little as three). Additionally, for rate-term refinances, many DSCR lenders have no seasoning requirements at all.
• Easier qualification: DSCR lenders have much lighter qualification requirements than conventional or portfolio lenders, such as no DTI, income verification, or tax return hurdles that can slow down or disqualify loans
• Flexibility: While conventional and bank lenders are heavily regulated and follow standardized rules, DSCR lenders have much more flexibility and control over their guidelines. This allows DSCR loans to be more adaptable to the market as real estate investing strategies change, including the BRRRR method. Some examples of this include being able to embrace the "AirBnBRRRR" strategy (i.e., not requiring a long-term lease for the "rent" portion of BRRRR before approving the refinance) or allowing investors to borrow in an LLC or other creative structures.

[Isaiah Thelwell]

Quote from @Timothy Howdeshell:

When you get a loan that is recorded as a mortgage, a lender will want that money to "season". 

Basically you can't (or rather the lenders won't) do a cash-out refinance before the seasoning period (6 months typically; I've heard some are pushing 12 months now). These guidelines are set by Fanny/Freddy. Most mortgage originators sell their mortgages to Fanny/Freddy and so follow their guidelines. 

The reason for this is to prevent people from getting a good deal, immediately refinancing, pulling all of their cash out, and having no "skin in the game". Also I think there is some financial penalty for the mortgage originator if their loan is refinanced before 6 months, but am not certain about that. 

In a BRRRR you need to refinance to pull out your cash outlay and repeat the process.

Is this the case for anytime use the BRRR strategy? I must wait 6 months each and everytime?

[David Mitchell]

Hey Isaiah! The term "seasoning period" usually refers to the amount of time you're required to hold a property or a loan before you can refinance it, especially in the context of the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategy.

During the BRRRR strategy, individuals typically purchase a property using hard money loans (high-interest, short-term loans used for property investments) to fund the purchase and renovations. After the property is renovated and rented out, they seek to refinance the property with a traditional mortgage to pay off the hard money loan and potentially extract some cash.

However, some lenders impose a seasoning period for refinancing, which means that you must hold the property for a certain period (often six to twelve months) before refinancing is allowed. This is done to ensure that the property has been stabilized and to mitigate risks for the lender.

Since there are various lenders and loan programs available, it's critical to connect with a knowledgeable mortgage professional who can guide you through the refinancing process and help you understand the specific seasoning requirements of different lenders.

If you have any further questions or need additional clarification, feel free to ask!

[Ryan Horne]

Look into local banks who keep their mortgages in house. I have found success with them with no seasoning. 

[Stacy Raskin]

There are lenders that will do no seasoning if a substantial rehab was done and can use the new appraised value for a DSCR loan. If the lender doesn't consider the rehab substantial enough, there are some lenders that will do a cash out refi for what you bought the property for plus the money you put in and have receipts for supplies and labor for the rehab with no waiting period. Otherwise, if you want the new appraised value used for the cash out refinance, generally looking at 3-6 months of waiting or seasoning of the loan.

[David M.]

@Isaiah Thelwell

There is one other important issue.  If the lien / loan (of a conforming loan) is repaid within 6 payments (i.e. 6 months), the lender and the loan officer are charged with all the costs.  So the lender has to pay back the money it made selling the loan to the secondar market, ie. fannie mae / freddie mac.  Also, the loan officer get the commission clawed back so they lose their commission.

As mentioned, the sales price also sets the market value.  By letting 6 months go by, one can "reasonably" expect a new market value.  As mentioned, if you done a major rehab it can be a reason to shorten the timeline.

If you do a brrr with a cash purchase, the Title issues should be less.  I believe that was the original concept for the brrr.  However, so many people want to invest without any money (kinda the antithesis for investing), that the brrr is starting with financing which is adding to the comlication.

Good luck.

[Andrew Postell]

@Isaiah Thelwell You've got some good comments above.  The short is that yes, seasoning exists, and no, you should never face it.  Usually, if we are facing seasoning it's either because we are working with the wrong lenders or have structured our deal incorrectly.  I wrote a post on how to find real estate investor friendly lenders and what questions you should be asking them.  You can find the post HERE if you would like to read it.  Thanks!

[Nick Belsky]

@Isaiah Thelwell

Lots of great responses here.  

Planning is everything. When you are analyzing your deal, be sure to include the perm financing as well. A good broker can help you with both to make the transition as seamless as possible. There are few lenders who will require no seasoning, some require 3 months, and you get a DSCR loan just about anywhere at 6 months of seasoning. To be fair, I've yet to find a fix and flip lender who also does perm financing well. Seems like it is one or the other. Lol.

Cheers!

[Quinton Booth]

Quote from @Isaiah Thelwell:

Hello, i've been hearing different investors talk about a seasoning period when refinancing out of hard money during the BRRRR process. can anyone help me dive a little deeper on what this is/mean?

 Isaiah,

Most lenders require 3-6 Months of seasoning. However, options exist that will finance 100% LTC, meaning purchase and material costs can be funded prior to meeting a season requirement.

Hope this helps.

[Alex Bekeza]

@Isaiah Thelwell Regarding BRRRRs, seasoning is going to refer to the length of time you've been on title.  With us, we allow cash out up to 75% of the new appraised value as early as 90 days of ownership (most banks want 6-12 months before they'll do it). 

[Benjamin Emery]

Quote from @Robin Simon:

Quote from @Isaiah Thelwell:

Hello, i've been hearing different investors talk about a seasoning period when refinancing out of hard money during the BRRRR process. can anyone help me dive a little deeper on what this is/mean?

Yes - seasoning refers to the ownership period (in months) between the purchase and the refinance. Check out this recent BP article on BRRRR seasoning that dives exactly into your question!

https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...

Refinancing: Conventional or Portfolio Lenders vs. DSCR

There are multiple considerations to optimize the refinancing portion of the BRRRR method. Generally, for the optimal refinance, these are top of mind for BRRRR strategy investors:

• Return of capital: The key "secret sauce" of the BRRRR method is to build portfolios using the same capital over and over—which relies on getting your basis (or more) back on the refinance, where basis refers to the money you invested in the property (down payment and cash used for renovations).
• Speed: Refinance lenders use the term “seasoning” to refer to the amount of time (typically in months) between the purchase of the property and the refinance. Velocity of money, or speed in which you can complete a BRRRR investment and repeat, is key to success, and refinancing with the shortest seasoning requirements is highly important.
• Loan terms and interest: Cash flow is also an important consideration for a refinanced rental property, so attaining a low interest rate, as well as other aspects of loan structure (term, amortization, or interest only, etc.), plays a big role.

Generally, there are three main refinance options for BRRRR method investors:

• Conventional loans
• Bank/credit union loans
• DSCR loans

Conventional loans are generally defined as loans originated under GSE (Fannie Mae/Freddie Mac) rules and guidelines and securitized. Bank and credit union loans are generally defined as “portfolio lenders,” or lenders that hold the loans on their balance sheets. DSCR loans are loans issued by private lenders with proprietary and differentiated rules and guidelines and are typically included in “non-QM” securitizations.

The advantage of conventional refinance loans is that they typically have the lowest interest rates and fees. However, BRRRR method investors have run into a lot of trouble using conventional loans for refinances for multiple reasons, especially in 2023.

One issue is the challenge of qualifying, as conventional loans will have DTI requirements, income requirements, loan size limits, and loan amount limits that investors looking to scale a portfolio run into as soon as the financial freedom snowball starts rolling. But most importantly, in April 2023, Fannie Mae changed cash-out refinance seasoning requirements from six months to a full year. This is hugely problematic for the "speed" aspect of BRRRR investing—drastically slowing down the returns and velocity of capital for BRRRR investors using conventional loans.

Portfolio lenders are another option, and they typically offer competitive rates and fees as well. Banks and credit unions can also offer flexibility for investors that engage in strong relationship-building strategies, offering discounts and solid loans in exchange for borrowers willing to use the institution for other purposes (savings accounts, etc.). However, downsides include regulatory restrictions on bank lending, many institutions that restrict concentration and geographies, and other headaches and issues that arise when dealing with a slower-moving bank.

DSCR loans are the option that has completely changed the BRRRR lending landscape in the last few years. While DSCR loans tend to have interest rates a bit higher (generally 0.75% to 1%) than the other two options, which can challenge cash flow, this comes with some advantages that are uniquely suited to the BRRRR method. These advantages of using DSCR loans for refinances using the BRRRR method include:

• More flexible seasoning requirements: As of April 2023, the seasoning requirements for conventional cash-out refinances is now 12 months, but many DSCR lenders are still at just six months (with some even as little as three). Additionally, for rate-term refinances, many DSCR lenders have no seasoning requirements at all.
• Easier qualification: DSCR lenders have much lighter qualification requirements than conventional or portfolio lenders, such as no DTI, income verification, or tax return hurdles that can slow down or disqualify loans
• Flexibility: While conventional and bank lenders are heavily regulated and follow standardized rules, DSCR lenders have much more flexibility and control over their guidelines. This allows DSCR loans to be more adaptable to the market as real estate investing strategies change, including the BRRRR method. Some examples of this include being able to embrace the "AirBnBRRRR" strategy (i.e., not requiring a long-term lease for the "rent" portion of BRRRR before approving the refinance) or allowing investors to borrow in an LLC or other creative structures.

 Hi Robin,

Thank you for your post as this is directly applicable to my situation. I'm currently about to close on a wholsale deal for $222k, purchased with an 0% down HML loan (using other propteries at collatoral) and the plan was to rehab, refinance out of it but the lender requires 20% down to refinance and so we feel our only option is to just flip once renovated. We'd love to figure out a way to keep it and I just read your post on DSCR rate and term immediate refinance. My question is: can you reccomend a lender that provides a rate and term DSCR refinance with no seasoning requirement?

[River Sava]

Hi Isaiah - 

Usually lenders will not touch a refi if it has not been "seasoned" for 6 months. However, some lenders can execute at 0-3 months of seasoning...

[Alex Church]

Lenders all have different guidelines for what they're seasoning requirements are. I work with lenders who need to see that you've owned the property 3 months, some who need to see you've owned it 6 months, and some who need to see you've owned it 12 months, so it really depends on which lender you go with. When my clients refinance out of hard money loans with less than 6 months seasoning, but that done rehab, I always go with an option that has a 3 month seasoning period so that we can use the after repair value to base the refi one. 

[Erik Estrada]

Quote from @Isaiah Thelwell:

Hello, i've been hearing different investors talk about a seasoning period when refinancing out of hard money during the BRRRR process. can anyone help me dive a little deeper on what this is/mean?

 The seasoning period applies to cash out refinances. 

Conventional lenders require 12 months seasoning

DSCR lenders can do no seasoning as long as there is renovation to support the new appraised value.

If you are looking to payoff your current loan (no cash out) There is no seasoning requirement