When should I refinance out of an owner financing deal?

Question

Hey everyone, have a question regarding my current owner financing deal. I was able to secure a single-family rental from an FSBO who was willing to finance with me. Got all the title work done and had a legal mortgage note written up alongside the purchase contract. This was all last month. My question is that now that I have legal ownership via the mortgage note, how soon can I (should I) refinance? Is there a certain time I have to own the property before refinancing? The current deal is on a 5-year balloon loan, and I would love to refinance asap but wasn't sure of the possibility with the deal being so fresh.

Nathan Grabau · Answer

This probably comes down to the terms of your current owner financing. Generally speaking refinancing makes sense when: a balloon is close to coming due, you can get a lower rate, you can reduce your monthly payment, or you can get cash out. I carry all of my investment properties on 7 year balloons, and I do not have any intention of refi'ing out of them to cover me against the balloon payment until I am 12-18 months from the end of the term of the loan. With regards to how fast can you, you can whenever you want, since it was owner financed, you do not have the window where the note has a "curing" period. If your 5 year balloon amortizes on a 10-15 year schedule then it could make sense to refi sooner, but if it amortizes on a 30 year schedule, then it will make less sense to. The owner financing of the deal will also help for future deals for 2 reasons. The first is that it does not effect your debt to income ratio, which helps you get access to future financing. The second is if you chose to owner finance more deals, you could use the people you are currently owner financing through as a reference for people who are weary. If you do this, and it is legal in your state, I would encourage you to pay or give a referral gift to the owners. A prospectus seller being able to call them, and they say "Hoa has made the payments on time every month for the last 36 months and was very easy to work with" could be very beneficial to you.

Matt Devincenzo · Answer

@Hoa Nguyen I wanted to address this as I see this mentioned a lot on BP, and it is patently false and a dangerous idea that keeps spreading. If you apply for a loan you must disclose ALL debt that you are obligated for. So a loan that is not reported to a credit bureau (like an OF deal) may not show up on credit but 100% needs to be placed on your loan application when you apply. If you do not do so it is fraud plain and simple. Your DTI is what it is regardless of the type of debt you have, it's just whether the information comes from your report or if you disclose it as part of your application...but this being OF does not change the liability and its impact to DTI.

Hoa Nguyen · Answer

Your point on using the current sellers as reference is absolutely great! Never thought of it like that!

Account Closed · Answer

What will the bank's mortgage interest rate be in 4 years when you start your refinance? Can you guarantee that? With current rates going up and a looming recession and the government and fed not changing their bad habits, I'd look to see what rates were in the 80's to get an idea of how bad things can get.Generally, you need 6 months of seasoning to get a bank to do a refinance. I'd seriously consider doing that and refinancing and Not taking an ARM or a balloon.

Nathan Grabau · Answer

This is true if you bought it in your personal name. But if you buy it in an LLC, the LLC is the entity that services the debt, not you(personally).

Matt Devincenzo · Answer

This is true for many more scenarios than just properties in your personal name, including those that are single member LLCs. Also the applications I've seen ask for all debts for entities which you own and control more than (usually) 25% of the entity. So even many partnership type LLCs will be subject to this requirement. Your assertion was this doesn't hit your DTI which in and of itself is untrue. I bring this up because it is thrown out there in a trite and simplistic manner as though factual all over BP (and has been for years), when in the majority of cases the 'fact' will not bear true.

Jared Hottle · Answer

Why did you decide to owner finance to begin with? Was it to make repairs, because you didn't have down payment? credit? Once that condition has been fulfilled I would look to refinance? No sense in refinancing right now if you do not have enough equity in it and will need to bring money to close to the table.