Delayed Financing (cash out refinance) question

[Ori Skloot]

Hi folks,

I am in contract on my next deal in Oakland, CA.    I would appreciate your advice on whether there are any gotchas that would prevent me from executing my plan.

Purchase price: $250,000 (paying all cash)

Closing costs: $5,000

Repairs: $25,000

Total Cost: $280,000

ARV (estimated): $380,000

I am borrowing $250,000 from friends so that I can buy the property for All Cash. I would like to record a promissory note and deed of trust against the property for their loan.

After I close and do the repairs I would like to get delayed financing and pull out as much money as I can from the property. I'm hoping to pull out $266,000 ($380k x 70% LTV), rent it and be cash flow positive.

Questions:

• Is there any issue with getting delayed financing when having a promissory note and deed of trust recorded on the house for the money my friends loaned me?

• What will be my max LTV percentage? I assume 70% if it's an investment property? I heard it fluctuates depending on the number of properties with loans you own. Currently I have 3 SFDs with a conventional loan and 1 SFD free and clear.

• My DTI is going to get very tight. Will the debt taken on with the new loan for this property hit my DTI? My plan is to rent out this property. Will the rental income (I can have it rented by the time I do the loan) be calculated into my DTI?
• Anything else I’m not thinking of?

Thanks so much for your help!

[Chris Mason]

Hi @Ori Skloot,

Yup, it means you're not buying it all cash. Mortgage underwriters have a higher standard for what "all cash" means than sellers and real estate agents do. :) 

You are purchasing it with a private mortgage. Fannie Mae will not view this as an "all cash" purchase, because you're purchasing using a mortgage just like most people do - it just didn't happen to come from a bank. It's good that you asked, this is the number one "whoops" surprise that folks trying to use DFE encounter. This will be a rate and term refinance of a $250k mortgage, not a cash out refinance. 

If you want to recoup all costs, including the reno budget, ask if your HML will lend you $280k. It would be just like rate and term refinancing out of any other renovation loan, where it's normal for purchase price to be way lower than loan amount.

Yes. 

Only way to find out for sure is to submit to underwriting. 

Best execution for DFE (or a DFE-like rate/term refinance like this one) is to get preapproved for it before going into contract (a preapproval for you, not to show the seller), and get the process started before closing on the purchase. Underwriting, appraisal, etc, all during your inspection contingency. The seller doesn't need to know you are having it appraised by a lender, they just need to know that you're having someone you trust take a look at the property during your inspection contingency period (and that's a true statement assuming you trust appraisers). 

As I'm sure you are aware, it takes about a week and a half to get an appraisal back and conditional loan approval, and then about two or three weeks to wrap it up. Ideally you close on the "cash" purchase (in this case HML purchase) with that appraisal and conditional loan approval in-hand (letting you know if you are going to face issues -- maybe there's something else you didn't think to ask about in OP that is a deal-breaker... do you want to know about that before you close on the purchase, or after?), and are out of the HML 2-3 weeks after closing, minimizing interest paid at that higher rate. In your case, that would give you about 1.5 to two weeks to get a tenant in there with a security deposit made.