Getting pre-approved for refi BEFORE writing all-cash offer?

Question

My husband and I are first-time investors. If I am understanding the refi chapter of the BRRRR book correctly, David advises getting pre-approved for a refi BEFORE you even put a cash offer on a home. Am I understanding that correctly?

If so, how do I communicate to a lender that that's what we want to apply for (I assume this is different than a traditional refi on a primary home)? Is there a specific refi type we should ask for? Do I need to have a specific property or scenario in mind? What types of questions/documents will the lender ask us for? FYI we will likely be investing out of state.

Joe Splitrock · Answer

I think what he means is get prequalified for financing in general. Not on a specific property, but just prequalified to buy an investment property. They will tell you what dollar amount you are approved for. THEN use your cash to acquire and rehab a property, knowing you have been approved for financing. For example, you get pre-approved for a $200K rental property with 25% down. You pay $60K cash for a house, put $40K in with expected after rehab value to be $200K. You know you were already approved for $200K, so when the property is rehabbed, you apply for a loan. This assumes you have cash or access to cash to make an "all cash offer". If you don't have cash or line of credit, you can't make a cash offer.

Julia Taylor · Answer

To clarify, the reason I am asking this is because the BRRRR book says this at the beginning of Chapter 8:"A crucial part of ensuring the BRRRR process works for you is to know you can actually pull money out before you start the process. It can be crippling to your success if you invest all your capital in acquisition and rehab of a property, only to find out at the end of a project that you can't qualify for a loan and can't refinance the deal. Talk about watching your ROI plummet! The wise investor makes sure they are pre-approved for a loan before writing offers, and this will pay off for you in the end."But so far the responses I've gotten to my initial question indicate this isn't normally how it's done?

Alex Hunt · Answer

Julia, as a lender what I see most often from my cash buyers are the 2 following options.1st- you are not wrong to check to see what the cashout refinance numbers are before the purchase but then you run into the issue of seasoning period, not sure what Jon was talking about, our seasoning period is 3 months not 3 years.2nd- Best option in my opinion for this case, to do what is called a delayed purchase. This is specific for cash buyers, you can buy in cash as planned and get 80% of the purchase price back to you right away on a 30 year refinance of the cash purchase.Hope this was helpful for more information send me a message or inquire on Brrrr Loans BP page

Nicholas L. · Answer

@Julia Taylor you are right in that you want to be highly confident that you will be able to refinance - but not that you're actually pre-approved or locked into a loan when you buy.This means calling banks or other lenders and just going over scenarios with them.For example, if your DTI would be too high to be eligible for the loan, this is something you would be able to find out up front. Or if you're counting on getting 80% out but can only get 60 or 70%, this is, again, something you'd want to know. If you're in a strong financial position it's highly likely you will be able to refinance - it's just also very possible you'd get a lot less out than you might be counting on.Hope this helps. I'm going through the refi process now myself.

Mike Davis · Answer

@Julia Taylor in order to get the best advice on how to move forward, can you advise credit scores, reserves, buy and hold, or fix and flip strategy, can you prove income or do you need a low/no doc loan?Providing this information, someone will definitely be able to point you in the right direction.

Dave Skow · Answer

@Julia Taylor- the refinance you describe is for a cash out refinance on a property you would already own ....the idea is to get your cash lined up to buy the new property via the loan approval on your present home ..this way once your offer is accepted - you pull the trigger and close on the refinance on present home - get the cash and then use the cash to buy the home outright ....if you dont own a home with equity - then this idea wont work

Jon Q. · Answer

No, you're not understanding that correctly.You need to own a property before you can cash out refi it. And FYI usually lenders require a weathering period, a period that you need to own + manage the investment (typically 3 years), before they will provide you cash out refi financing.

Alex Hunt · Answer

Grayson Spittel · Answer

@Julia Taylor hey Julia - Delayed Financing is done on the value of the property after repair value ARV. The best way that you can do this is to even wrap your rehab costs into your initial cash purchase statement. This allows the shortened seasoning period and also allows you to get back 80% (for a SFH) of the ARV during the cash out refinance. Finding an investor friendly lender - not a Wells Fargo - and they’ll be able to assist with that. In regards to making sure that you qualify for the refinance - the only issue I can see you run into, so long as you don’t have a horrible credit score/DTI, would be making sure that your lender doesn’t have a minimum loan value. I’ve made cash purchases before, where naturally most people are looking at cheaper houses in order to afford that kind of purchase, where the ARV after being fixed up was below $100k appraisal value when some lenders for instance won’t make loans below $75k. Easy fix though if you run into that, just find another lender. And with today’s market, much harder to find a house that isn’t worth $100k afterwards! Good luck.

Julia Taylor · Answer

@Alex Hunt Thanks Alex - just to clarify, option #2 would be based on the before rehab purchase price, not the after rehab value?