BRRRR: Refinance From 203K Loan - LTV 90% Cash-Out Refi Inquiry

[William Kwong]

Hi BP,

Question for you BRRR loving people - My renovation on my first house-hack for my multi will be completed in the upcoming months. I used a 203K loan to fund the renovation.

$454,000 - Purchase Price

$124,000 - Renovation (Gut Job)

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$578,000 - Current Mortgage

Based on my analysis (not an expert) but my ARV is looking around 700K (praying for more) once it's finished and I plan on refinancing my loan into a Conventional to get rid of PMI.

However, with 700K I'll be a few percentages shy of 20% equity. - I've spoken with mortgage companies who are willing to do 10% down Conventional loans where I would just pay PMI until I hit 20% and call to tell them to stop charging me for it.

So here's the math, if I am able to refi and get a new loan at 90% LTV of $700,000. (.90 x 700K) = $630,000.

I will then use that $630,000 to pay off Loan Number 1 of $578,000. 

[Looks like my new mortgage payments would be similar as my current from using mortgage calc. with pmi.]

My excess cash is $52,000. This would essentially be my cash out refi. I would have to pay PMI for the next 5 years but at least my renters are paying for it.

But is my math correct???? Is there a catch with these mortgage deals, am I allowed to take that much cash out? Do I have to pay tax on the cash-out refi? I'm not very familiar with 10% conventional loans nor have I come across people doing this on BP refinancing less than 20% so I just want to pick your brains to see if my head is in the right place and my math is on par. Thanks in advance guys!

Best,

Bill

[Zack Karp]

Sounds like you got some bad info. You cannot do a 90% cash out refi using conventional financing. A cash out refi has a max of 75% LTV for a multifamily. You would only be able to do a rate/term refi, which is 85% max if this is a 2-unit, and 75% max if this is a 3 or 4-unit.

This is the part where I tell you to align yourself with a rockstar loan officer who can help you see the future and not put you into a position to get stuck.  You need to know your numbers, and to be looking 2,3,4 moves ahead before you pull the trigger.  And your LO should be looking out for you and not looking out for their pocket.  They should have helped you with figuring out your exit strategy.  At least that's what I do with my investor clients, and any LO worth their weight should.

If this is a 3 or 4-unit property, now you are going to be stuck in that 203K loan for awhile. Or you can do a FHA streamline refi if the rate sucks, but it's still FHA and the mortgage insurance isn't going away.

I'm not licensed in NJ, but if you need someone there, PM me and I can refer you.