MY FIRST RENTAL PROPERTY

[Richard Ramirez]

Hello everybody,

Looking for some guidance.... I'll be getting a second house(new built) in April this year, therefore my current home (Let's call it the Newbury home) will turn into my first rental property. I just refinanced two months ago my Newbury home from VA loan to a Conventional loan so I can free up my full entitlement to buy this second home with no down payment. NEWBURY home estimated Value 333k Loan amount is 254k.

My question is... How long do I have to wait to do a cash out refi from my Newbury home so I can get another investment property (most likely a townhome) ? I know I have to have a 20% down payment when buying investment properties. Colorado springs market is booming and prices are going up. A decent townhouse in a decent area  goes from 200 to 280k. We have military bases here and Amazon is building a big warehouse. 

Any suggestion is welcome.  Thank you!

[Seth Wilcock]

Hi @Richard Ramirez - Some excellent questions indeed!  There is a lot to unpack here, so I'll work on addressing topics one by one.

Newbury home - you just refinanced this home 2 months ago, and I'm guessing you probably did this as a primary residence to get the best interest rate.  Correct?  I encourage you to read through your deed of trust, particularly the section about "occupancy" to ensure you are not violating the terms of your deed of trust.  New loan = new deed of trust = new occupancy rules and 12 month waiting requirement (if you refi'd as a primary).  I've included an excerpt below from my deed of trust as reference. 

If you closed the refinance as a primary residence and your current lender discovers that you are not occupying the home as a primary residence when you said you would occupy for 12 months, this is considered mortgage fraud, and the bank can accelerate your loan, issue fines & penalties, and/or throw you in prison.  You would need to refinance the home again as an investment property if you have no intention of living there for 12 more months.

Using a conventional refinance to restore your VA entitlement is allowed one time. You'll need to submit form 26-1880 to the department of VA to ensure your entitlement is restored to full entitlement. Your mortgage lender can help you with this, and will likely ask for a copy of the settlement statement from the refi you just did to submit with form 26-1880 request for one-time restoration of entitlement.

The max cash-out allowed under Fannie/Freddie is restricted to 75% loan to value on a 1-unit investment property. 2-4 unit homes have a max 70% LTV under Fannie/Freddie for investment cash-out refi's. Depending on how much cash you want to pull out for your next refi will tell you what your home would need to be worth at that time (the home will be an investment property if you're not going to live there). $333k value x 75% = $249,750 max loan amount today. $400K value x 75% = $300K new loan.

You can actually buy an investment property with as little as 15% down. Your rate will suck and you'll be paying PMI, but from a down payment perspective, you only need 15% down to buy a single-unit investment property with conventional financing under Fannie/Freddie guidelines. If the property is a 2-4 unit investment purchase, you'll need a minimum 25% down under Fannie/Freddie.

Lastly, we should discuss your VA entitlement a little bit, and VA's guidance with the one-time restoration rules. The Newbury home was originally obtained with your VA entitlement, and you refinanced this home with a conventional loan to restore your entitlement back to 100%. You are going to be using your VA entitlement to buy a new construction home (we'll call it "Property B") in April. Assuming you eventually refinance Property B with a conventional loan, you won't be able to restore your VA entitlement since this is allowed one time, and you would have done this on the Newbury home. If you want to restore your VA entitlement again to be used on a subsequent VA home purchase after Property B, you would need to sell Property B AND the Newbury home to restore your entitlement back to 100%.  This is a weird little rule that VA has, and not many people know about it.  Excerpt from VA Pamphlet 26-7 (Revised) Chapter 2: Veteran’s Eligibility and Entitlement, article 6 listed below for you reference: