Cash Out Refi Lenders After Full Gut Renovation Before 6 months

[Jason Berroa]

Hello BP colleagues,

Looking for some guidance/advice here. My sister recently purchased a 2 family home with a 5% down conventional financing loan on 9/8/2017 for 304k. She then proceeded with a full gut renovation which is projected to be completed mid-December 2017. When fully completed she is hoping to do a cash out refi to pay off the 1st mortgage plus the rehab funds invested in the home roughly 150k private financing. She will owner occupy the residence and rent out the other unit. A recently completely renovated home with similar specs (sisters is a bit smaller) just sold on the same street for 530k. If her home appraises at 500k at 90% LTV she would be in the clear. My concern for her is 1.) the so called seasoning period. Is this still in effect? If so, how long will she have to wait before a cash out re-fi? Also, are their any lenders out there who offer 90% LTV? Not looking for a specific Lender rather just want to be sure they exist. From what I understand most lenders only offer 80%LTV on cash out refi's or less.

I'd greatly appreciate any of your feedback in regards to what options/avenues she may pursue.

Thanks,

JB

[Andrew Postell]

@Jason Berroa I'll post 2 sections of information here since people do read these posts after we are done.  So while the first section might be too late to do for your sister maybe it will help someone else in the near future.

1. The loan that is most likely to fit your sister's scenario is that she should have gotten an FHA 203k loan. This loan type can be used specifically for a 2 unit property that you will occupy. It will also allow you to roll in the renovation costs and have as little as 3.5% down. So, if your sister would buy the property for $304k and have $150k in renovation costs, then she would only use $15,890 of her own money as a down payment. Where this gets tricky is that FHA does have county loan limits. In Massachusetts there are a lot of counties where FHA will lend this high but for argument's sake, let's explore the other loan type....conforming, conventional.

A conforming, conventional rehab loan would required your sister to use 15% down for a 2-unit property that she will occupy.  This would mean she would need $68,100 of her own money using the same math above.  Quite a difference. But $68,000 is still better than what she will receive now.

Now to answer your specific question...

2. Since your sister received a loan to purchase this property she would need to wait 6 months to receive a 'conforming, conventional' loan (a loan that is governed by Fannie/Freddie).  She could get another loan...but more on that later.  If she were to get a conforming cash out loan she would be limited to 75% of the value of a 2-unit property.  That is the MAX that both Fannie and Freddie will allow.  Banks do not have a choice on this number with this loan type. So if the property appraises for $500,000 then she could receive a loan for $375,000....or have $79,000 out of pocket currently...she would also have to pay for the closing costs again too. She already brought $15,250 out of pocket when she bought the home so her total outlay on this property is going to be $100,000 or so.

HOWEVER, there is another loan type - "portfolio" loans.  Portfolio loans come from the bank's own portfolio of money - thus the name.  And since the bank calls the shots, it is possible (but not guaranteed) to find a lender that will lend higher than 75%.  I will state that most will not lend over the 80% mark on a cash out loan with a duplex though but that doesn't mean that it's not possible to find one though.  She would literally have to call every single bank out there to find out all the different loan types.  Start at the small banks first.  If you haven't hear of it, then that's the bank you want to call.  They have more flexible terms.  The terms will be significantly harder than a Fannie/Freddie loan though.  Don't be surprised if you have an adjustable rate mortgage, if there is a pre-payment penalty, if the rate is higher, if it's only a 20 year term....and some have ALL of these restrictions on the loans.  But if the benefit is getting cash....well, she'll have to compare the terms on her private loan against the portfolio loan to find out if it would be work it.

*WHEW*  I know that was a lot of information so feel free to tag me and ask more questions if you need.  Good luck!

[Harjeet Bhatti]

She will be able to cash out on appraisal value after 6 month. 75% LTV is max for cash out for 2-4 units.

[Scott Graham]

Shop the deal around to lots of small local banks. They are willing to allow you to refi before the seasoning period is up.

[Marc Dube]

if its an owner occupied home you could also do a home equity line of credit before the 6 months is up. that way she can get her cash back and the ability to get long term financing later.

[Jason Berroa]

Thanks for the replies folks. @Andrew Postell We pondered the idea of the 203k however with it being a such a competitive deal, in our scorching hot sellers market (1.5 months of inventory) they probably would have went with one of the other offers with a quicker close date as the sellers had another home UAG. Additionally, my experience with 203K's has not been all that kosher when you are looking to do more than 35k in renovations. You are required to hire a 203k consultant which in theory should be beneficial but in reality it is alot of handholding and red tape. The conforming conventional rehab loan would have been the right avenue if the funds were in place which at the time they were not.

Maybe it is wishful thinking, but I am not yet sold on the idea that 75-80%LTV will be the max payout for Cash Out Refi's. This will require some further investigating and also visiting some smaller local banks right to your point @Scott Graham. 

Cashing out at a higher LTV% is a higher priority for her than cashing out before the 6 month period.

@Marc Dube, how does the bank determine the amount of a home equity line at this stage? Would they send out for an appraisal? Or would they go off the purchase price plus documented upgrades? Or something else?

[Marc Dube]

Depending on the individual lender they may do an online valuation or even go off the tax assessed value from the town. I took out a home equity with one credit union and they went off the tax assessement, which in my case was substantially higher than what an appraisal would have come back with. In your case the online valuation may be higher because of the comps in your area. Check around with the different credit unions as well as banks you may be surprised.