How Does Refi Work?

Question

I just want to be familiar with this process before I start taking any of my next steps.

If I were to purchase a property via hardmoney then rehab to set up as a rental, how does the refinance process work? Is the refi based on the deal itself (how much equity is left) or is it the same as getting a regular home loan (Based on my personal income and DTI ratio)? The current deal I am analyzing would have about 20-25% equity after rehab

The problem I'm having is that my current situation won't support a typical loan of this size. If anyone can offer some insight from personal experience doing the BRRRR method that would be great.

Chris Mason · Answer

It's both. Need equity, and need DTI, etc, to work. Rental income can be used to qualify, if needed.Before you've owned it long enough for it to appear on tax returns, it'll be [ lesser of appraised or actual rent, times 75% ]. This is pretty conservative and often hurts.After 2017 rolls around and you file taxes, lender can use actual rents and actual expenses to calculate DTI. There's a little more to it, but for starters put all your rehab costs on line 19 "see statement 1" of Schedule E, broken down and itemized in a way that I can line up one-time expenses with invoices for $x, $y, and $z that line up perfectly with "see statement 1" to exclude those expenses from DTI.There's no reason you can't get preapproved for that refinance prior to purchasing the place hard money. HML have a great degree of flexibility; if one feels that the preapproval for a refinance decreases risk, they at their sole discretion might decide to offer you better terms on the hard money.

Alex Saleeby · Answer

In that case you may be looking at using an asset based lender. Terms will not be as good, but still doable. LTV max around 75% and higher interest rate. You might want to find such lenders and find out what sort of deals they do and their terms to take that into consideration in your analysis.

Kamil Smith · Answer

Chris MasonThis was a situation I came across a while back. Probably a better flip than rental though.Let's assume the property's ARV is about $330k and purchase plus renovations total about $250k (refi amount), which would rent for about $2100/mo. Also assume PITI would be about $1800 (+capex and maint, vac). Small cashflow or breakeven but in a good neighborhood not far from the new Antioch BART.Am I missing anything?

Kamil Smith · Answer

@Jerry Padilla Ok I'm going to talk to some lenders and see what I can do to get my foot in the door. I'm trying to figure out how to obtain a buy and hold rental but it's proving difficult with my <$40k income. Thanks, rate and term sounds like a good fitChris Mason Thanks that is some great info! I have no debt whatsoever, good credit, and a decent savings with about $38k income. With that info, how much refi power would you estimate I have? Just so I understand, with rents being 2000,($2000x.75=$1500/mo) I add $1500/mo or $18k a year to my income?

Chris Mason · Answer

@Kamil Smith - Again, the scenario is sufficiently complicated that all paperwork is needed to give any meaningful answer either way. In my experience, it's a complete waste of time to go back and forth using stated income, stated asset, stated credit, stated rental, etc, when in reality in 2016 no one is doing stated income/asset/credit/rent/etc loans. Even the hardest of the hard money folks are going to verify the value of the asset being lent upon.

Brent Coombs · Answer

@Kamil Smith, a couple of things:- a 75% refi from a $330k appraisal doesn't get you all the way to $250k; and your "(+capex and maint, vac)" outcome is very likely to be more than $300/m, resulting in you landing in negative cash flow territory. How conservative are your numbers?...

Chris Mason · Answer

@Kamil Smith

Chris Mason · Answer

That's still an incomplete scenario, and the math done isn't to add it to income, but to offset PITI of subject property. Would need to see all the paperwork and know what assumptions to make, in order to give a meaningful answer.

David Dye · Answer

I have a program for CA and NV that allows for approval based on the cash flow of the property. It uses a .85 DCR. Only requires 20% equity, 680 FICO, and 3 months reserves... Rates are really good fixed and adjustable and can amortize up to 30 years. However, it requires that you have 2 years rental experience... (Unless you can put up more equity. You could always refi out into a program like this but you need to make sure there is no prepayment penalty on the hard money deal you get. Hope this helps! -David

Jerry Padilla · Answer

@Kamil SmithIf you are only going to have 25% equity in the property after going the hard money route..... Your best option may be to rate and term refinance. An investment property rate and term, has no seasoning requirements and requires an LTV of 75%