Avoiding the 6-month Seasoning Period on Refinances

Most lenders require that you wait six months after you purchase a property to refinance it, and pull cash out, known as the seasoning period. The good news is, there are strategies to avoid this seasoning period and increase the velocity of your capital.

To start, it is important to note a distinction (one of a few) between a cash out refinance and a rate and term refinance. A cash out refinance is exactly what it sounds like, a refinance where you pull cash out of a deal. A rate and term refinance is also what it sounds like, simply a refinance changing the interest rate and term of the loan. Generally speaking, a rate and term refinance will have more competitive interest rates than a cash out refinance. 

Using the rate and term to circumvent the 6-month seasoning period combines the best of both refinances. So long as there is a lien on your property - think, for example, a hard money lien - you can use a rate and term refinance to change the rate and term, and pay off the lien.

What if you could control the lien amount and ensure it was high enough so that the lien amount covered both your purchase and rehab, up to 75% of the ARV? Lenders will typically offer a rate and term refinance where there is a hard money loan, so, with this strategy, we are going to replace the hard money lender with your LLC, and ensure that your LLC has a lien on the property that equals at least your purchase and rehab amount.

Here are the steps to use this strategy:

• -Purchase a property, using cash, in your personal name
• -Have the title company simultaneously record a lien by your LLC against the property for 75% of the ARV
  • -This can be a 0% interest loan from your LLC to you where the LLC is loaning you the funds needed to purchase and rehab the property
  • -This loan should include purchase price and rehab costs, or whatever you would like to recoup when you refinance (up to 75% of the ARV)
  • -This is essentially a hard money loan from your LLC to you
• -Refinance the cash purchase and rehab by using a rate and term refinance
  • -This rate and term refinance will pay the lesser of: your LLC lien amount or 75% of the ARV, which allows you, or more accurately, your LLC, to pull cash out

Here is an example of this strategy:

1. -8/30/2021: Purchase property for $44,500 cash in personal name
2. -8/30/2021: LLC records $52,000 lien against the property, which is 75% of the projected ARV
3. -9/2021: Rehab totaling $10,000
4. -9/19/2021: Appraisal for $70,000
5. -9/26/2021: Approved for rate and term refinance to pay off the existing lien of $52,000, which is 75% of the ARV
6. -10/13/2021: Rate and term refinance closed

As you can see, this is a powerful strategy that allows you to recycle your cash quickly. In the above example, we were able to buy and rehab a cash flowing property, and reuse that same money we expended on that property, in six weeks. All the while, we were able to obtain a more competitive interest rate because it was a rate and term refinance, not a cash out refinance.

This is a creative strategy and it does require due diligence at the outset. You should identify a lender before starting the process because this strategy is not blessed by every lender. In fact, most lenders will not work with you to accomplish a rate and term refinance where your LLC is the lienholder. Additionally, you should discuss drafting the loan documents, from your LLC to you, with both an attorney and your title company.

It should be noted that delayed financing offers similar benefits, though has pitfalls in limiting your ability to recover your full rehab costs, and sometimes forces you to pay your contractor in bulk upfront, rather than in draws. Delayed financing also, generally, has less competitive rates than a rate and term refinance.