How do you determine when you'll be able to refinance?

Question

If you get something with owner finance or lease option how do you know when you'll be able to refinance?

Is it usually a matter of your overall debt to income ratio and it's length of history? Or is it just the income of your property to it's debt service(I wish)? How do conventional loan(not FHA) providers qualify you?

Robert Sepulveda · Answer

@Benjamin Cowles, you're asking for two different scenarios

• Owner Finance: You're right, it's a function of your overall debt to income ratio and a 12 month mortgage history, since it is essentially a private mortgage. You may get a few lenders who'll let you do it with a 6 month history but it may be difficult to find. After that, it is a loan to value qualification. How much debt vs the value of your property that will usually stay at 95% or less as long as you're not taking cash out.
• Lease option: you don't own the property, so it wouldn't be considered a refinance at all. You'll have to exercise your option to purchase, then enter escrow and get qualified to buy the property. Expect a 5% downpayment requirement for conventional loans (there are some exceptions for 3% and 1% down programs- check with your lender) and then all the qualifying conditions mentioned above. So if you're looking to get into a creative deal that allows you to refinance out the seller, owner finance would be better. However, if you are looking to buy and live in the property or use the property while you save for a downpayment, then this could work for you.

Hope that helps

Chris Mason · Answer

Quick note on the lease option stuff @Benjamin Cowles (and lurkers):

We do not care, and will not count, the option deposit, extra rent, etc, as part of the down payment. You're throwing that money in the garbage, AND THEN need to come up with the required down payment.

Robert Sepulveda · Answer

@Benjamin Cowles the owner financing is essentially a private loan. A seller will have you sign a purchase agreement with a cash down payment for a portion of their equity and a note for the balloon payment. That note is a private mortgage. But I didn't see any mention before of the three year timeline, so you're right, there wouldn't be an issue with timing either way if it's three years down the road.

Yes, there are portfolio loans and private money that will primarily consider the strength of the cash flow on each property, once you have a stabilized two year rental history. They will all still consider your credit score and stated income, then the rental income and net profit per unit. Those will put you in the 6% to 8% range of rates vs 5% to 6% for conventional investment property loans. So you just have to calculate for that contingency in your analysis.

Benjamin Cowles · Answer

Thanks Brian. Hey, I saw in another thread where you mentioned you used notecollection.com to service rent payments between TB's and seller's banks. Around how much does that run if not a flat rate or %? Thanks again for all your contributions. Been reading a lot of your posts

Benjamin Cowles · Answer

Thanks Robert

Brian Gibbons · Answer

Hi @Benjamin Cowles

If you are buying on a lease w option, you used to be able to "refinance" the contract into permanent financing.

Now you need standard underwriting with FHA and conventional, 3 - 5% down and DTI under 43%

See

http://www.fhahandbook.com/debt-ratios.php

If you had another type of financing, say contract for deed or Land Contract, that might be different, a possible refi.

Benjamin Cowles · Answer

Thanks Rob. You say "since it's a private mortgage". What did you mean by that? When I apply to refinance say 3 years after paying the seller, what will a lender care about what type of arrangement I have with the seller?

I think what I'm asking is do lenders ever look at just the income a property produces vs it's debt service rather than the applicant's overall income vs their overall debt?

I do my property analysis based on the property itself , not my self and my total income and debt ratio.    And now just thinking about it it would seem silly for a lender not to consider an applicant's overall financial situation over just the asset they're applying for a loan for.

So assuming they do look at the total financial situation, do they look at the asset itself as an income producing business? And how is it weighed?

I plan on producing income through flipping so I guess I'm foreseeing a possible situation where in the beginning I might land more 'buy and hold's vs flips through seller financing then come up on a balloon payment and be forced to sell rather than refinance because my income statement is insufficient. I guess either way I'm not too concerned and do expect to be flipping enough to produce sufficient income but I am new at this so I'm just trying to foresee as many scenarios as possible. Thanks!

How do you determine when you'll be able to refinance?

Most Popular Reply