Short Term Commercial Loan while Renting Primary Residence?

Question

I have my primary residence on the market now, but if it doesn't sell the way I'd like, I may have to get creative. I say "the way I'd like" because I have a certain amount of equity I want to get out of the home.

What are your thoughts on refinancing my primary residence, renting it out, and taking out a commercial loan to move into for a year? I don't even know if this is a possibility (pretty sure it is) but thought I would put it out there. This home I would work on for a year while house hacking then sell. In the mean time, I will have someone in my "primary residence" to use as income and be able to buy another personal primary residence after a year.

Why don't I rent out my current primary residence and buy another home, you ask? Because my W-2 income doesn't allow for much wiggle room (nothing that I would like to live in anyways) on purchasing a second home.

Thanks in advance for suggestions!

Jaime Brame · Answer

Great information! I reached out to my real estate agent and am going to adjust. I think it's a smart move. I still walk away really clean.

Thanks for weighing in!

Dustin Davis · Answer

@Jaime Brame We dropped about 10% off our original asking and came out with roughly  8% over what I'd paid for it 5 years prior. The price drop put us a good bit under the comps in the neighborhood and it sold within 2 days of the change. Seemed a win-win in our book, considering it allowed us to have some immediate cash for investing and a lot more coming in... We also moved in with my Grandmother for 8 months while we looked for another home so that helped as well...

Dustin Davis · Answer

@Michael Slockers You might be correct with it being FHA, I head something of the same mentioned on a BP Podcast recently... Seems like it would be a bonus to get rid of the PMI and do a cash out refi.

Jaime Brame · Answer

@Dustin Davis Thanks for the info, Dustin. I understood that you cannot get out the PMI with an FHA unless you refi with a conventional.

That makes sense regarding what lenders lend and why.

How aggressively did you drop it? I may need to crunch my numbers again and see how comfortably I can drop it. Great info!

@Michael Slockers I realized you said the same thing about PMI on an FHA loan. Oops! :) Thanks for at least commenting!

Michael Slockers · Answer

@Dustin Davis My understanding is that with FHA, the PMI never automatically drops off - you're locked into PMI for the life of the loan.

Conventional loans are not the same. And there are definitely low-downpayment conventional options available.

@Jaime Brame Not sure I can help but if you'd like to chat just message me!

Dustin Davis · Answer

@Jaime Brame @Michael Slockers ... The other piece of information that's missing in the HELOC equation is what is the home worth or what would it appraise for? Considering you have PMI makes me think you haven't hit your threshold (I think 22% equity of purchase price) to have it drop automatically which means you are very near your limit where the banks will be comfortable lending... Most lenders we spoke with won't go over 90% LTV and a lot wanted to stay under the 75% mark or else they jacked up the rate and shortened terms...

Early on my wife and I were in a similar situation and essentially were "house poor". We priced it aggressively and got out from underneath it. That being said, if your house has been on the market for 30 days (no offers?) you might need to evaluate if it's priced to move. Might need to get a little more aggressive with pricing especially heading into a slow season for sellers.

Jaime Brame · Answer

Thanks, @Michael Slockers. Too bad I didn't get to meet you! The room was a touch crowded so I left fairly early.

1. Based on the market, I have roughly 50k of equity

2. 2.5 years

3. I already have an FHA on this home, so one option is refinancing with a conventional loan which will also rid me of my PMI. However with my DTI and limited single income, I still don't have enough income to buy another home with an FHA or conventional home that's greater than maybe 65k. I've tried to analyze multiple creative ways but am trying to determine what to do with my primary residence (either continue with trying to sell-only been on market roughly 30 days) or rent it out and then purchase another home (with restrictions).

Maybe we can actually chat because it's tough to explain on here.

Thanks again for reaching out!

Michael Slockers · Answer

Hey @Jaime Brame

It is a little difficult to follow what your exact situation is, but have you considered a HELOC on the house if you need access to cash to fund your next deal? Some banks are offering intro HELOC rates at 2%. Not sure how much equity you may have...

Some relevant questions:

1. How much equity do you have?

2. How long have you owned the house?

3. How much downpayment would you need on your next house and are you sure you couldn't do conventional or FHA financing on it?

Let me know if I can help out. I saw your name on the Tulsa meetup list.

Don Konipol · Answer

Don't quite understand what you are asking.  There are no commercial loans on 1-4 unit residential properties.  Just either primary residence, secondary residence or investor residential loans.

What is it that you are trying to achieve?  if you are trying to cash in your equity in your personal residence, there are three primary ways to do it.  Sell, refinance with cash out, or take a second loan/HELOC. If you are unable to sell your house for a price that gets you your perceived amount of equity out, and the house has been competently marketed for a reasonable period of time, then you have less equity in the house then you think.  The price your property will sell for in the current market determines your equity, your "equity" does not determine the market value.

Leasing your current residence, while it can be a profitable financial move, usually does not result in improving your ability to obtain a loan since lenders will credit you with 75% of the income from a one year lease and subtract your mortgage, taxes, insurance, HOA fees, and maintenance charges.  The exception to this would be if you move into significantly less expensive housing, thereby decreasing your monthly outlay.

Borrowing against an investment house is at a lower LTV and higher interest rate than a personal residence. Further, lenders will lend based on the income of a single tenant under a 12 month lease, not multiple tenants and not short term rental income, as those two activities constitute a business.