Cash out refi for down payment. Covid rules?

Question

We are looking to use  a cash out refinance on our current home. We have a second home we are interested in and would move to. We would rent our current home. I spoke with a loan broker and the cash out refi is not a problem, but there are current loan rules in place due to covid buying that blocks us from using the cash as a down payment. They suggested having a family member gift (what are the tax implications ) or hold the money for 2 months to have it cool off and use it then. Do any of you have input for how we should proceed?

David Kelly · Answer

I have never heard of such a thing.  There should be no limitations on your own money.

Iris Chiou · Answer

Hi Samuel,

From my understanding, you cannot cash out refinance your primary residence and use those funds immediately to buy another primary residence. That would be a violation of your mortgage terms. If you are planning on refinancing your current primary residence, you can use those funds immediately for a second home as a vacation home or investment property. Another option would be to refinance your current primary residence into an investment property and then use those funds to buy another primary residence. Definitely recommended speaking with your lender further to discuss different options. Hope this was helpful!

Samuel Persson · Answer

The lender stated the state (CA) applied to rule to slow down the buying surge

Ashley Cross · Answer

Are you using primary loan terms to cash out your first property and also trying to purchase the 2nd home as your primary residence? In regards to having the money be gifted then waiting 2 months for seasoning that makes no sense. Why wouldn't you be able to use your own cash from the cash out refi and wait 2 months then? You are able to use debt financed by an asset for a down payment but maybe they have an internal rule that blocks that.

Michael Dumler · Answer

@Samuel Persson I have not heard of this specific cash-out refi rule, in fact, most investors use this strategy all the time to grow their rental portfolio. How much equity do you currently have in the property? I know to successfully utilize a cash-out refi you are required to have at least 20% of equity in your home. The only thing that comes to mind is that there may be a clasue that says you have to remain in your current home for a certain period of time. I would speak to other lenders and see if you can get more favorable terms elsewhere. Hope this helps!

John Leake · Answer

That doesn't make sense to me when you refinance the property you are pulling out your equity from a property in cash there shouldn't be any restrictions on what you do with it, it's your money..... I would speak to another loan person and get a second opinion. I guess it could be something specific to your area but this just doesn't sound right.

Cash out refi for down payment. Covid rules?

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