How to Cash Out Refinance / Little income / House Hack

[Brendan Savage]

My brother and I co-own a 4 bedroom home that we purchased fully in cash in September 2020 for $167,000. It is now worth about $200,000 conservatively. We rent out two of the rooms cheaply to friends, which collects $725 a month.

I am looking to sell and want to invest in multi family, but my brother wants to stay put. I have always wanted to invest more, but I have kind of been stopped from pursuing potential leads, as my brother does not have much of a work history in the last two years, while I work full time. His work history has hampered any ability to pull money out of the house to get a loan and pursue other investments.

We had come to an agreement that he would be willing to buy me out of my half of the house for $88,500. He would need to do a cash out refinance to do this, and I could take myself off the deed. He would rent out the third bedroom which would allow him to earn $1075 a month (total for three bedrooms) to cover expenses.

Are there lenders out there that would be willing to lend to him, and allow him to do a cash-out refinance? He has about $22,000 in cash reserves, and would look to use the rental income to help pay. He is currently in EMT school after passing a civil service exam to become a professional firefighter, so he is at least on a career path now.

I have become frustrated by the situation, I'm not sure if there are lenders that would lend to him. I just want to get out at this point. I spoke to one DSCR lender who wouldn't do it because it would be his primary address.

[Alex Breshears]

Hi Brendan! This is a tough situation because this would be a primary residence for the remaining owner and that comes with a lot of hefty Federal regulations to go with it. Primary residences are protected as a consumer's home - which includes licensing and loan parameters for conforming loans. You are correct in that DSCR loans will require someone to use the home as investment property only.

I see two possibilities for you. The first would be to have you buy HIM out of the property, and then everyone signs a lease, so you have documented income from that property. Then it would be investment property for you, you can use the depreciation benefits of ownership, you will have documented income coming in from the leases. This allows you to also show "experience" in owning a rental, as many lenders right now want experienced borrowers because they are perceived as less risk. The second option is calling some small local banks and credit unions and see if they have any programs that may allow the other owner to do a cash out refi, since the loan amount would be roughly 50% LTV they may be interested in that loan due to the low LTV.