BRRRR: How to Secure Refinance Loan Before Closing?

Question

I'm trying to implement my first BRRRR strategy and I'm wondering if it's possible to secure a refinance loan at 12 months before I close on the deal with hard money?

Jason D. · Answer

@Asher Knudson the quick answer is no. Too much can change in 12 months to guarantee a refinance will work in 12 months the same as it would today. What you should be doing is, at least, have a strategy. Speak with a few lenders so you get an idea of what they offer and a rough idea of documentation that they will need. It's more about getting your ducks in a row than securing financing.

Ryan R. · Answer

If you are just trying to find an estimated cost to refi with a traditional lender, you can either just call a local lender and explain the situation and ask them to provide you with their customary costs or a fee sheet or see below for some ballparks of what to expect.

When it come to points and rate these will never be accurate until you are ready to lock as the rates and points will vary on a daily basis, but lenders do have standard hard costs, like underwriting/processing, doc fees, tax service, flood cert, ect. (most lender fees are around $1500-2500 plus cost of appraisal $400-650 including rent survey that will normally be required on an investment property), don't be fooled by "no cost" offers, any lender can offer this by increasing the rate to cover the closing costs, so, when shopping get both a no-cost est as well as a standard cost estimate and compare the cost to the payment savings and how long it take to re-coup the difference between the options, (ie. Cost difference = $3000 and payment difference is $30, then it takes 100 months to recoup the cost difference) sometimes it is a benefit to have the lower payment and pay fees upfront to save long term (if you plan to hold for 10 years or 120 months then the lower payment option would be $600 less over the term you plan to keep property, remember that an impound account is not a cost to include in this calc, you get this money back it is your money and just held by the lender and paid on your behalf) if you are doing short term it may be better to have a higher payment and no cost upfront.

In addition to these expenses you will have escrow and title costs associated as well, the title is usually based on loan amount but, if I was to just be estimating I would say average title and escrow cost to be about $2500 on average (not knowing the loan size, but if you are under $400K then this will be a decent estimate). Then county recording fees $100-300. Then there is the cost of taxes and insurance, insurance will usually need to be paid in full for a year unless you have more than 6 months remaining on the policy, the taxes may need to be paid if they are due within the next 2-3 months and possibly an escrow account established.

Hard costs not including points or origination fees are going to run typically $3-5K, 1 point will be 1% of the loan amount and is a pretty standard origination fee for lenders to charge, escrow account set up depends on the time of year you refi, but if you figure 12 months insurance cost and 6 months taxes you will be close.

Ryan R. · Answer

PS. With standard conventional financing you can expect that most lenders will use the LOWER of the appraised value vs the purchase price (plus actual cost of improvements) during the first year of ownership to determine the LTV and loan amount. However, there are Alt A lenders out there that can offer rates that are close to conventional rates that will use appraised value after 6 months ownership and will also use the Debt Service Ratio of the property rather than your personal income just in case you have DTI issues.

Ryan R. · Answer

Like Jason mentioned, get some referrals to a couple of good loan officers in your area, talk to them about your scenario and strategy, find one that you trust and can build a relationship with and discuss with them how you can make sure to set yourself up to qualify for a loan income wise, best to do this before you file your taxes this year as your tax preparer may be looking at best refund vs best way to show income that a lender will use on your schedule c & e, also please do not forget to use depreciation on schedule e if you can, depreciation is a deduction that can be added back in to your income, I have seen a lot of schedule e's that do not have this deduction when they should have.

Michael Ealy · Answer

Do you mean you have a hard money loan on the property now?

And you want to secure a refi loan before you pay off the hard money lender?

Yes it's possible but at 12 months before you pay off the HML? NO. That will be too early, unless you want to pay off the HML early and there's no prepayment penalty. You can approach a conventional lender probably 3 months before you pay off the HML because it will take 1-2 months to close anyway.

Michael Ealy · Answer

Talk to mortgage brokers. Also, usually, the closing costs of a refinance is generally between 1.0-2.0% of the loan amount (smaller amount - say up to $200,000, use 2%).

Asher Knudson · Answer

@Michael Ealy

Thanks for the response Michael. I'm trying to get all of my costs on paper up front. I have a property that I'm going to use hard money to finance and at the 12 month mark or earlier I plan on refinancing.

Is it usually common that the refinancing conversation doesn't happen until about 3 months before the point at which you want to refinance?

So how do you estimate the closing costs of a refinance loan before hand?

BRRRR: How to Secure Refinance Loan Before Closing?

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