Cash-out refi lender insists I pay cash for new properties!?

Question

Doing a cash-out refi on my primary residence. My plan was to use the proceeds to fund the downpayments on turnkey rentals. I stated this upfront when first talking with the lender. But now that we're almost to closing (4 days til Fri, 8/2), underwriting insists that I provide a letter stating that I will be purchasing this new real estate solely with the cash from the refinance and with no additional mortgage.

Is this normal? It seems like they should leave that to the next bank that has to qualify me for the subsequent loans.

In fact, the CEO of the lending firm responded with the following:

"He will be getting a conventional mortgage(s) for the new properties. But these new properties are tenant occupied with existing leases, so there should be nominal affect on DTI. Further, to qualify, he will still be subject to the same Agency guidelines as for this refinance. So his credit profile after purchase would still meet Agency guidelines."

But in spite of that, underwriting isn't buying it and insists I send them the letter by end of the day, today.

I'm hesitant to walk away, as the terms seem pretty decent (3.5% 30-yr fixed, 1.533 pts).

What would you do?

Kevin Grove · Answer

Jim,

We successfully closed on the loan!

I think what must have happened is the underwriter thought I was in the midst of a real estate transaction. So they wanted to underwrite that too, to be sure it didn't negatively affect my DTI ratio.

I simply re-worded the letter to make it clear that I did not have any real estate under contract and did not have any property currently in negotiation but I would put the proceeds into an interest-bearing account. They responded saying just leave off the part about the real estate.

So, for the third time, I wrote another letter saying the proceeds of the cash-out refinance would be placed in an interest-bearing account, and they accepted it!

Kevin Grove · Answer

Thank you, Jim. That makes sense. I'll send a letter and hope it helps.

The main thing I want to avoid is having to commit to only buying subsequent properties. That would be a huge limitation.

Really appreciate your response, Jim.

Jim Blackburn · Answer

@Kevin G.

It’s normal… It’s a simple condition… The underwriter wants to know that you don’t have a private loan out there for these properties because if you did then she will ask to count the payment in your debt to income ratio.

The underwriter needs to do her due diligence as required by her license, and simply get a written statement from you whether or not you have an outstanding loan out there with another payment that is related to these properties that you are buying.

So you just write a short letter sign and date and turn in to the underwriter and then you close…

After closing, if you then go and get a loan with a payment, you don’t have to backtrack and go back to redo the refinance because you’re already closed and funded…

If you want to close the cash out refinance, you better write the letter.