Can you use a HML for rehab while getting a traditional mortgage?

[Tom Kuhen]

I've been trying to find creative ways to finance a deal that I am analyzing and haven't been able to find an answer to this question: Can I use a HML to cover the rehab. costs of a flip and down payment on a house, while taking out a traditional mortgage on the property? I am relatively new to RE and asking this question may show that. I asked another newer investor the same question, and the only thing that would be a concern is that the bank may not approve because it's not technically my money.

Example:

A house is listed for 60k, I put 30k into the rehab., and sell it for 130k. Instead of having the HML fund the 90k and paying the costs for however long (2-6 months), could I get a mortgage on the property, and use the HML to cover a 20%(or less) down payment as well as the rehab. costs? Then I would be only borrowing 42k and then paying the mortgage which would probably be a lower payment than the HML.

Are there any advantages to doing this (if it's even possible) / are there any disadvantages?

I may be missing something completely, and if I am, please don't hesitate to point it out.

Thank you,

Tom Kuhen

[Luis Roel]

Refi would go like this:

1. HML first (10-25% down max 15% interest, usually in the 9-12% interest range), purchase the property, do the rehab. Now the market value of the property is higher, this is known as the ARV (After Repair Value)

Now you have three choices, you either:

A. Sell the house once rehab is finished, pay off the HML. What's left over is your profit.

B. Refinance into a conventional mortgage (Variable down, Interest rates up to 10%, harder to qualify for, lots of red tape) for a percentage of the ARV, the difference between the total cost for the HML and the dollar amount that percentage represents is what you get back in cash. You can then use that money to start the process over again on another property or just pocket it. The plus is your payments have gone lower. The con is you essentially now owe more than you did originally, however. If you rent it out and the mortgage payment is less than the monthly rent income then you have positive cash-flow. Also referred to as a "cash out refinance".

C. Refinance the house only for the amount for which you owe the HML lender. Payback the HML, rent out the property and make sure rent is higher than the monthly payment on the loan. You do this so that it lowers your monthly payments and allows you to improve cash flow on the property. This is a normal refi.