First Time Homebuyer Multifamily FHA + 203k Refinance + Cash Out?

Question

Hello!  Long time reader, first time poster!  My husband and I have recently purchased our first home and investment property using an FHA backed loan with a 203k rehabilitation loan component.  The initial purchase price was $475,000 with a rehab of $160,000 and a 5% down payment of $32,000 for a total mortgage of $603,000.  There are two homes on the property, one of which we will live in and one which is a rental unit bringing in $1,700/ month.

The loan is a relatively high interest rate (~4%) and carries mortgage insurance of $425/ month.  The appraised value of the property after renovations are complete is around $675,000.  Needless to say, we want to refinance into a traditional mortgage ASAP.

Here's my questions:

1. We would like to cash out approx. $30,000 to pay off some high interest consumer debt.  Will banks approve this and also allow for the mortgage insurance to be dropped from the loan?

2. At the initial closing, we placed $10,000 into a Mortgage Insurance Escrow account.  Since the $425 mortgage insurance payment is included into our monthly mortgage payment already, what happens to that escrowed money when we change loans?

3. I've received differing advice on when to refinance.  Many advise waiting six - nine months after close of the initial loan.  It seems to me that getting out of the mortgage insurance and high interest rate sooner rather than later would be wise.  Is there something I'm missing?  What is your advice on timing?

Your advice and experience is much appreciated!

Wayne Brooks · Answer

As said, to avoid PMI your loan will be a max 80%ltv, and get a loan based on appraisal, verses purchase price/costs, you're looking at 6-12 months seasoning. So, to refi just the $600k, you'd need an appraisal of $750k, and $787k or so to add the other $30k in.  Maybe just me, but I have to chuckle a bit when people refer to 4% mtg rates as "high".

Mark M. · Answer

@Kristen Miller congrats on your first property!!! Taking a page out of the @Brandon Turner playbook and house hacking is a fantastic way to go about it. Wish you much luck in the future.

@Albert Bui awesome info. I'd say a lot of it went over my head but its awesome to have this amazing community where you can seek out answers and get intelligent, relevant information from people who know what they're talking about and aren't pretentious about it.

Albert Bui · Answer

HI Kristen,

It looks like Sebastopol is a part of Sonoma County. I just did a single family residence deal there earlier this year but it was a 1 unit so loan limits are 554,300 as opposed to yours which is $709,600 so it looks like your loan amount is below that which may help you get financing if you're considering a refinance.

FHA allows a cash out to 85% of current market value so if you believe you're at 603,000 loan amount then you'd need a min appraisal of 709k or so to refinance this home into a conventional loan if you're trying to remove mortgage insurance.

There are lines of credit to 89.90% or 90% of your homes value if you're interested in having access to your equity (if the property appraises high enough).

To address your questions:

1) If it appraises high enough yes you can remove monthly MI and you can use a line of credit 2nd to access your equity (this would be your best bet). Most loan programs only allow you to cash out to 80-85% whether conventional or FHA.

2) if its unused its refunded back to you post closing. This usually takes 2-4 weeks to receive this refund.

3) Lenders are afraid of a "charge back," because if a borrower pays off our loan too early (conventional, FHA, VA, USDA loans, etc) we are warned that we get charged back our commission. Each investor that a lender sells their loan to has different requirements on how many mortgage payments need to be made before we are not longer at risk of a charge back. Some investors require 4 months, some 6, and some 12 months for their claw back clauses for charge backs. This is not really a "con," for the borrower however it is a courtesy to your lender that you do not payoff the loan till this phase of time ends. With that said, you technically can refinance any time you want after you close because these conforming loans generally have no prepayment penalty.

The other aside that I will mention is that you will want to make sure you have sufficient comparable sales in your area that will be able to document enough value before you spend money on a non refundable appraisal. A lot of lenders may tell you the appraisal is free however its not free if you dont close you will still pay for the appraisal typically (its only free and credited back at the end or at the closing table).

The other part is to make sure rates are where you want them to be (low enough).  Refinancing is a fine balance of having rates low enough and having values in your area to be high enough so that you can actually close because if rates are low but values are low and you cant appraise then the low rates would be of no use. Conversely if values are high but rates are high you can appraise for the value you need but the rates will not be so appetizing.

In your case where you have FHA monthly MI of .80%- .85% even if you could refinance to the same rate you have right now and remove monthly MI it would be worth it since you'd save around 400 dollars per month most likely.

First Time Homebuyer Multifamily FHA + 203k Refinance + Cash Out?

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