Cash out refinance Vs. Portfolio Loan Help?

Question

Hi BP community!

Have an interesting situation on my hands and I think I know which direction to take, but I'd love the opinions and thoughts of the community to help guide my novice self!

Situation:

I am buying a property from my father. The property is paid off in full and has no mortgage currently on it. Instead of doing a purchase transaction, what we did was add my name to the title via a quit claim deed, and we plan on doing a cash-out refinance to pay out my father for it. I estimate the property to be around $220K in value, and want to pay my father out about $160K for it.

Caveats:

• It is zoned as a single family residence, but there is technically 2 units (Front and Back. Maybe considered an in-law unit?) and one unit is currently rented out. I plan on living in the front unit and househacking the rear unit. Not sure how this will affect the appraisal process?
• I plan to get the new mortgage under my name, but keep my father on the title for the time being so there is no mess around me only being on the title for less than 6 months (We just processed the Quit Claim Deed last month, April 2018).

Question:

After talking to a couple different lenders and explaining my situation, I am between two thoughts.

1) Go with a traditional cash out refinance. Looking at a fixed 30year rate of about 4.5%-4.75%. and monthly payments of ~$900 without taxes and insurance. Closing costs near $5K

2) The bank my father uses for a lot of his properties (US Bank) is pushing me to do a Portfolio loan for this property since it will be a lot easier to accomplish without complications since they would own the loan and not have to jump through Fannie May/Freddie Mac hoops. Their offer is to do a 20 year fixed rate at just over a 5% Rate. The thing is, they wouldn't charge a closing cost and take care of all appraisal/title fees etc..

Ideally, my goal is to cash flow as much as I can monthly so Traditional Cash Out Refi seems like the better way to do that. But I fear that with the situation we are in, it may make more sense to go with the Portfolio Loan so that we don't run into road bumps around the Quit Claim deed transfer and zoning issues (SFR used technically as duplex). I'd love to hear any thoughts or advice as I make a decision on this process.

Thanks to anyone who takes the time to read through!

Andrew Postell · Answer

@Lee Ribeiro lots to go over here so I'll try my best to address these one at a time:

• "Getting mortgage under my name to get around me being on title less than 6 months" - this method will NOT get around this Fannie/Freddie requirement.  Once they see you have only been on title for 1 month, even though your father has been on title for longer, you will NOT be able to receive a cash out loan.  It sounds like a bank may have guided you down this route?  Sorry if they did but this is not correct.   This will be caught and the loan denied.
• "I plan on living in the front unit" - this ALONE allows you to structure this deal correctly without jumping through hoops.  If you are planning on living in this property then you can purchase the property from your father.  You will not be required to have a down payment since your father can provide a "gift of equity" to you.  Therefore, you can give your father his money, in full, and not have any downpayment, and be in a 30 year fixed rate (assuming you and property qualify).  To do this route, you should remove yourself from the deed immediately. 
• US Bank 20 year fixed rate just over 5% - This is actually one of the best portfolio loan terms I have ever heard of.  This would be a pretty good product if you had no other options.
• 2 units on property - Is one unit larger than the other?  Are there separate utility meters for both properties?  Do the units share a wall?  Are they houses or mobile homes?  Lots of questions here so if you can provide other details that will help me guide you properly.

Andrew Postell · Answer

@Manon Sheiman here are your answers:

• For conventional, conforming loans (Fannie/Freddie loans) the rule is 6 months to receive cash out.  There are other loan types that won't have this rule but usually Fannie/Freddie carry the better terms/rates.  Pros and Cons to everything I guess.
• Buying a Property with Cash - This is an extensive subject but I created a post specifically for this topic and how to structure it properly HERE
• HML are one of the other loan types where the lender will have their own rules.  It is common for you to speak with one HML and find that they have different rules on it than another HML
• The gift limit you might be referring to is the cash gift limit?  Meaning, how much cash can you give to someone without it having Federal Taxes applied?  I'm guessing since I'm not familiar with the $30k reference (the limit is $14k per person in 2017). We are talking about gifts for real estate, which are not taxable, and have no limits.  So if a family member is buying a house, you are allowed to gift them down payment and/or closing cost money for them purchasing the home, no tax implication.  Likewise, if a family member is buying a house from you, you are allowed to provide a "gift of equity", again, no limit nor tax implications for this.
• I can't speak for every lender on the income thing for loans here but in general, an investor friendly lender should use the rental income to counter balance the mortgage.  As long as the lender does that, your mortgage debt should be a wash.

Hope these help.  Thanks!

Andrew Postell · Answer

@Manon Sheiman yes, my post that I reference above talks about NOT waiting 6 months.  I'll PM you.  Thanks!

Andrew Postell · Answer

@Lee Ribeiro the key ingredient to receiving a conforming cash out loan is you.  If you are on the loan in any capacity that is attached to the property, you will have to wait 6 months to close that loan (again, conforming loans).  Even if your father is on the loan with you.

For the closing costs and "gift of equity" strategy, you would be subject to the Illinois transfer tax...I think.  I am not licensed in Illinois but I think that is correct.  All the other closing costs would be the same if you refinanced.  Survey, appraisal, title insurance, etc.  All the same whether refinance or purchase.

The property as you describe it sounds like a duplex to me.  Separate utilities and sharing a common wall are the indicators.  The appraisal on the property will validate this information though so you may have to wait for that to know officially but be prepared for the duplex LTV and interest rates for the property.

Thanks for the Tip on the US Bank loan.  That's an amazing loan, especially if they pay for all closing costs and appraisal.

Good luck!

Manon Sheiman · Answer

Thanks, that is an incredibly helpful post!

Manon Sheiman

Manon Sheiman · Answer

Thanks, this helps (or doesn't!) a lot.

I am under contract for two SFR in San Antonio, and planning to pay cash to close, then would like to get financing as soon as possible. Am in a 1031 exchange, and property is in the name of our family trust, so I need to quitclaim after closing to get a conventional loan, I'm told.

Do you have any loan products that I might be eligible for right away? I'm using funds I'd planned for our new house remodel, and really don't want to delay it 6 months.

Lee Ribeiro · Answer

Incredibly helpful! Thank you much Andrew - it's contributors like you who slowly help knock down the scary walls of ignorance when attempting to get into this industry.

Thanks again!

Manon Sheiman · Answer

@Andrew Postell How long does one have to be on title to get a cash-out loan? I've read 3 months, and I've also read that if I buy a property all cash, I can get a loan immediately, so I need better information. Does a HML have anything to do with this requirement?

Can you expand on your statement that the father can give a gift of equity to the son? I was under the impression that the gift limit was $30k per year for two parents to a child. Is there no limit when it comes to equity? (That would be fantastic.)

Is there a limit to the amount one can borrow on investment properties in traditional loans as opposed to private or HML? In other words, do the loans count against one's income in a traditional loan, or only against the income of the property as in a HML?

Sorry, don't mean to hijack the thread, but others may have the same questions as well, and thank you so much for your answers! So grateful for all the info and help on BP forums.

Lee Ribeiro · Answer

@Andrew Postell Thank you for the thorough response here! Much appreciated. To follow up:

"Getting mortgage under my name to get around me being on title less than 6 months":

so it seems here that at this point with the situation at hand, there isn't going to be a way to do a traditional cash out refinance on the property under my name given it's only been about a month (even if we keep my father on the title). The only option here I assume would be to put my father AND myself on the new loan as well as keep him on the title? (Doesn't seem like the route I would want to go anyway)

"I plan on living in the front unit"

This alternative route seems like I would have to go back, take my name off of the deed, and instead of doing a cash out refinance, this would just be a straight up purchase transaction. I understand the no money down part, but it seems like we would incur a lot more closing costs and taxes going this route?

US Bank 20 year fixed rate just over 5%

This seems with where we are at now, it would be the least path of resistance option to take on. I guess my question here is, is there any difference down the line (I plan on buying more properties in the future) with having a Portfolio loan vs a traditional loan when applying for new credit?

2 Units on Property

One unit is a 2BR/1BA and the other unit is a 1BR/1BA. They do share a wall as well as they have their own electrical meters. This is a house(not mobile home). This was purchased in foreclosure back in 2008 I believe as is and has been functioning as a 2 unit (possibly referred to as an in-law unit?).

Both units have two entrances and individual kitchens. I do believe that this property is technically zoned as a SFR so I'm not sure what further implications this has on the appraisal process...?

Very eager to hearing your response on the topic! This is definitely an interesting situation for my first stint at the REI world and everything I learn is invaluable.

Cash out refinance Vs. Portfolio Loan Help?

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