Cash Out Refinancing Requirements

7 Replies

I just learned from my mortgage broker that I need a "settlement statement" in order to qualify for a cash out refinance on a property I am considering purchasing & rehabbing. In this settlement, I was told I need to document the amount of rehab money I put into the property in order to qualify for the delayed financing. In order to do this, I need to show proof on invoices, which would be hard to do because I intend to do a portion of the rehab myself instead of using a GC for everything. 

Any quick tips/experiences with this would be very helpful. Thanks!

I am confused.... are you paying cash for the property or using HML?

If using an HML they will prepare this for you.

To me this sounds like a general closing disclosure and would only relate to fees paid outside of the loan. I am not expert on this, but sounds like you may be overthinking this a little bit.

If I was in your shoes I would just point blank ask them this exact question since lenders need to earn your business to stay in business. Not sure if you think this is something you need to "hide", but as a rule of thumb honesty is the best policy and them knowing you're new won't be an issue if you can pay. 

Hope someone with more knowledge chimes in, but I definitely don't think you will get a better answer than just asking the lender point blank brotha...

wishing you the best, good luck!

@RyanTalmadge I'm using a HELOC to buy this property. I asked them point blank, and they said the only way around this is creating my own business so I could invoice myself to prove income..which seems much.

The BRRRR method is super popular obviously, but I'm just wondering how people do this while also doing some of the rehab work themselves to save money.

@Aaron Butler  

First, when doing a BRRRR it's always wise to talk to a refinance lender before you buy the property. Be very open with them about what you plan to do.

Second, this sounds like more of a restriction of the delayed finance program which requires you to put the rehab budget on the settlement statement. I'm almost positive this will not be required if you do a traditional refinance with six months of seasoning. Not ideal, I know, but better than getting a large amount of capital stuck in the deal.

@Aaron Butler I think I can provide some assistance here.  There seems to be several things that were mentioned so I'll try to separate them out just in case there is any confusion from me on a topic.

  1. Delayed Financing - This is a Fannie Mae/Freddie Mac term. So if you are not using a conventional, conforming, Fannie/Freddie loan then please let me know. The rule here is that if you buy with cash (or HELOC) then you can only receive back 75% of the ARV or your Purchase Price + Closing Costs...WHICHEVER IS THE LOWER AMOUNT. So the the reason why you would need to document your renovation costs as paid to your contractor on your settlement statement is that is how they become a "Closing Cost". Now this is pretty hard to do for some obvious reasons. Your contractor has to invoice the work, and you have to pay him/her for the work....before it's completed. So they have all of your money...before any work is done. Yikes!
  2. Creating a business to create income - now this phrase has alarms going off in my head big time.  The reason why you document the work is for the requirement I mentioned above.  If the lender stated you have to create income, does that mean you don't have any income to use?  Are you self-employed or do you have a "normal" W2 type of job?  If you do need more income just showing it on a settlement statement isn't going to work.  If there's any confusion here let me know and I can certainly square it away.

Not only is the delayed financing exception extremely limiting but it's also difficult to teach if you aren't working with in all the time. There is an alternative to the "documenting the contractor work on the HUD/Settlement Statement that I wrote a post for Bigger Pockets about that you can find HERE.  Let me know if you have any other questions and I would be happy to answer them.  Thanks for posting!

@Andrew Postell I do have a W2 income job. I was just wondering if anyone "creates" their own contracting business just to work on their own houses. Just to get around having to wait 6 months to get a full cash out refinance, and avoid the potential or getting the lesser amount between the ARV and purchase price in your post. So the only way I can get the max(75%) cash out refi in my situation is to create an LLC is what you are saying? Hope that all makes sense

@Aaron Butler it's not the ONLY way but it's easier than the paying a contractor at closing. They will ask for proof of would be the first person ever to create a company, pay yourself, and then try to refinance. You would be in unchartered territory. But we know for sure the other methods work. To me filing the lien with the LLC method provides more money back, lower rate, and provides better protections to you.