Subject prop. cash out refi - settlement to plaintiff?

Question

Haven't seen this before: the prelim shows an active suit, borrower wants to cash out an investment property to pay the settlement. Some proceeds to the settlement, some proceeds to the borrower. A NonQM lender of mine says they'd prefer not to mess with it, but this has to have happened before, right? Someone owes someone else, court ordered - they sell the house/do a cash out refi to pay the settlement.

What do you think is the best angle?

Alex Breshears · Answer

Depending on the state, there may actually be some regulations around the use of the cash out funds, which is why the lender is iffy about doing this type of loan.  If the settlement was for a personal reason, not related to the business/LLC the property is in, the lender may have a problem showing that this was a business purpose loan, which is where a lot of non-QM lenders want to be due to lack of regulation compared to owner occupied homes. Some states do not allow cash out refinances to go towards personal debt (or up to a certain percentage can only go towards personal debt), and still be considered a "business purpose loan".  The best shot might be talking with an attorney familiar with lending in your state and see if there is potentially a limitation on this due to regulations, and then once you know that you can resume looking for a lender that will allow cash out refi's to pay off personal debts.