Pursue Delayed Financing, or keep paying HELOC?

Question

I'm looking for some advice on the whether I should hold on to paying my month HELOC payment of $613 a month for a BRRR property, or should I go ahead and pursue delayed financing?

I purchased a property ALL CASH for $126,000 ($73,000 HELOC used) about 6 weeks ago that I'm going to end up putting right at $25000 of renovations into to turn around and rental looking to get $1800 per month. So, I know that I eventually want to cash out refinance so I can pay a FHA mortgage on the property. Looks like a mortgage right now will run me about $850-$900 per month not escrowed. With rates being so high right now, would it be best to wait and keep paying on the HELOC or go ahead and pursue delayed financing and get a mortgage and my money back on the property ASAP?

Stacy Raskin · Answer

@Doobie Sims, there are lenders that allow for delayed financing and who will use the appraised value before 6 months on a cash out refinance.

So if you buy a house for $126K and you do a lot of work on it, it appraises for $250K, the lender will use the $250K for loan to value purposes.

The 6 months or 1 year guidelines are for lenders that do qualified mortgages (QM) mortgages who sell their loans on the secondary market to government sponsored enterprises (GSEs) such as Freddie Mae and Freddie Mac to replenish their cash for more loans.

Non-qualified mortgages (Non-QM) can decide to adopt all of some of qualified mortgage rules to mitigate risks but they don't have to since non-QM lenders sell these loans to different investors on the secondary market to replenish their cash for more loans. Even though they do non-QM loans, some non-QM lenders will follow QM loan rules because it makes the lender and lender's investors who they sell their loans to feel more comfortable with the risk level. The lender's and investor's reasoning is, "if this is how the largest mortgage buyers like Freddie Mac and Fannie Mae do it, then it must be the right way to go." The same idea from back in the day that nobody was ever fired from working in IT, from buying a brand name like IBM. They do it to mitigate risk.

There are non-QM lenders who since they sell their loans to other investors will do cash out refinancing before a 6 month seasoning period off of the appraised value if significant work is done on the property. They will also delayed financing where they will lend up to 80% of the purchase price if you paid for the property in cash within the first 3-6 months from the original cash purchase (time period depends on the lender).

Generally speaking, an example of QM lending is conventional financing for owner occupied homes and a non-QM lending example is DSCR loans. The QM lender will originate the loan in the primary market to the homeowner and then sell the loan on the secondary market to the government sponsored enterprises (GSEs). Some of the biggest GSEs are Freddie Mae or Freddie Mac.

A non-QM lender will originate a DSCR loan in the primary market to an investor and sell it on the secondary market to investors who buy the lenders loans so they have flexibility in their loan criteria since they make it up themselves based on what they agree to with the investors who buy the loans.

It's good to do research because what one lender can do, another lender may very well be able to because of how QM and non-QM mortgages are sold in the secondary mortgage markets.

Sergio Mejia · Answer

@Doobie Sims

If you would like to get the highest leverage on the most recent value after repairs I would urge you to wait for the 6 month marker. You will then qualify for 75% cash-out with a Non-QM lender. Pay off your heloc, stabilize your investment property and do the process all over again. Hope this helps. Keep it simple!

Caroline Gerardo · Answer

I said you can get $88200 Fannie agrees with what I said. Assuming title remains the same, you can show a traditional closing statement and qualify full doc for the refinance.

You repeat that rate is prime for the draw BUT how long is the introductory rate good for? Numbers make the decision.

Loan programs can change in 4 months. Will a cash out non owner be allowed, no idea... What rate or terms will be in the future? If rate and terms stay exactly the same AND your intro rate on HELOC doesn't jump- same answer. Non owner cash out refinance costs money maybe $3500 . You cannot pay much points to buy rate down or the loan becomes HIGH Cost loan/ HOEPA rules. No conventional lender will close a High Cost loan which is pricing problem where a small loan doesn't adhere to federal rules. Look up Reg Z. This law can change in 4 months as well, no promises. Today you cannot go above 3.5% of total points and fees but many lenders limit it to 3% which is $2646. Lenders charge underwriting/processing about $1200, title escrow recording $900 appraisal $450 so there is no room for points. There is no pricing sheet today non owner zero points, because lenders don't want early payoff...  If your FICO is 740 see two lender sources with .85 in points with 7.5 30 year rate today. or $767 fee is lowest 767+995+300+900+450= $3410 in points and fees. Here is the catch 22 with a small loan- the flat fees are the same for a $88200 or a $300000 loan I would need my escrow to discount and so would I to get to $2646. Small loan is often more difficult than $300000 loan. The $767 I need to cut off exceeds what I earn, there's that catch.

Sorry the answer is a long one. There is a gamble in waiting. Don't know if there will be a loan in four months, maybe things are better with lower rates, unknown, maybe worse.

Doobie Sims · Answer

@Caroline Gerardo My HELOC is on my personal property and I've used that HELOC to purchase this investment property. The house was purchased for $126,000 and after renovations should appraise for around $210,000. The delayed financing exception states that you can cash out refinance for the LOWER of what you paid in cash or the LTV of the appraisal. In this case, mine would be the $126,000. Here is the wording from Fannie Mae:

"The new loan amount can be no more than the actual documented amount of the borrower's initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points on the new mortgage loan (subject to the maximum LTV, CLTV, and HCLTV ratios for the cash-out transaction based on the current appraised value)."

My HELOC is set to Prime rate (8.25%) for the draw period. I'm just wondering if I should stick with my HELOC for another 4 months, or go ahead and pursue the delayed financing route.

Andrew Postell · Answer

@Doobie Sims you have to wait 12 months to do a standard cash out refinance now.  That change occurred in February of this year.

Caroline Gerardo · Answer

You got the HELOC on an owner occupied property AND you want to do a refinance on another owner occupied loan program at same time? How?

Appraiser is going to go out and see a house that is inhabitable now in June or is torn apart? House needs to be inhabitable at close and if you get appraiser out there and they have to reinspect you pay for that. When you refinance the original sales price which is probably LOWER than the completed value (whatever is LOWER) is what is used for delayed financing. $126000 X 70 for non owner = $88200. Can you qualify with the HELOC (even when paid off lenders hit you with max payment on the line) plus the new loan?

Max payment on HELOC at 22% is how much?

This should have been preapproved for the long term loan before you used the HELOC or you may have to sell if HELOC rates increase. Typically they give you a starter low rate then bump to prime plus a margin of 2.75 or something in 3 or 6 months. What does your HELOC note say?

Doobie Sims · Answer

@Andrew Postell Wow I really appreciate that response! You offered some really good advice there. Yes, this is a single family residence. It will be my second investment property and I want to have it on a mortgage for sure as you were saying. I guess my question is wether I should pursue the delayed financing, or wait roughly 6 months to go with a more standard cash out refinance? No matter what I will be cash out refinancing the property and having a mortgage of roughly $118,000 on the property. I'm just wrestling on if I should pursue that now through delayed financing, or wait roughly 6 months. Thanks!

Andrew Postell · Answer

@Doobie Sims thanks for the post here.  Just some clarification, is this a 2-4 unit property?  I couldn't tell...but maybe I missed it.  You can certainly go to 75% with cash out loans on single family properties with Fannie/Freddie (even with Delayed Financing).  It is 70% with 2-4 units (and that's why I was asking).

But in either case, I would encourage you to refinance that home once the rehab is completed.  HELOCs are WONDERFUL products.  I wish everyone had one really.  To me, there's a couple of main points of difference between a HELOC and a Mortgage:

1. HELOC/LOCs have low costs but the rate adjusts

2. Mortgages are fixed Rates but have higher costs

What this means is that a Line of Credit is NOT designed to be a permanent financing solution. Two of the common areas of concern for HELOCs I see out there is the 10 year maturity date and the adjustable rate. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. Rates are higher now...but what will they be in 5 months? Who knows? That's called risk. Unknown = risk. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC, 10 years later it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when it matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

What HELOCs are designed for is to be a giant credit card.  And just like any credit card, you need a plan to pay it back.  So if you use it to say....buy another property. Then flip that property...thus paying back your Line of Credit. Then that's perfect! Because you will never get surprised by an adjusting rate or keeping a balance on it. Lines of Credit are PERFECT for people who have a plan to pay it back.

On the other hand, if you were going to use that Line of Credit for the entire purchase on a property that you were looking to buy and hold for 30 years....this would be very counterproductive. The 30 year fixed rate loan would be a better fit for this purpose.

Keep in mind there are TAX INCENTIVES too when you have a mortgage on an investment property.  HELOC tax rules changed a few years back.  Even more of a reason to put that rental property on a long term loan.

You might be able to think of some other scenarios but hopefully this concept is good enough to know the difference between the two. Thanks!

Doobie Sims · Answer

@Doug Smith appreciate the response again. I'm located in South Carolina. The house was purchased all cash for $126,000. Under the Fannie Mae guidelines of delayed financing you can receive a cash out refinance of the LOWER of the purchase price and closing costs of the property, or 70% LTV of the appraisal. In this case, the house is going to appraise for around $210,000 so the LOWER of the 2 going the delayed financing route would definitely be the $126,000 that I paid for it. So, all of that is factoring into my decision that in need to make in the next couple weeks. Thanks!

Doug Smith · Answer

What state are you in? That would help with my answer. $118K/$126K = 93.65% LTV. That's much higher than lenders will go on a non-owner-occupied property. FHA loans are not built for investment properties, so you'll likely either have to come to the table with cash to get the loan to a Loan-to-Value that a lender will allow (say 80% or less). The way around that would be to wait until the 6-month mark and to it at that point. At 8.25%, you would't be saving more than 1% for an investment property, so 1% at 5 months for $118K is an additional $492 in interest that you would be paying over what you would get for a fixed loan. I would wait and use the higher appraised value after 6 months to get a much better LTV and, perhaps, a better loan. No one has a true crystal ball about where interest rates are headed. We only have guesses. I do hope that helps you.

Pursue Delayed Financing, or keep paying HELOC?

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