Seasoning on Cash Out Refinance???

Question

Carl Dowdy · Answer

The 6 month seasoning period required for most conventional mortgages does not apply if the original purchase was made with cash or an unsecured loan (loan not secured by subject property). This could be money you borrowed from a HELOC, a rich uncle, a securities based line of credit, etc.  I routinely used this delayed financing exception and it works great, but be prepared to educate your lender about. Search for “Fannie Mae Delayed Financing Exception” on Google and you can learn more. Good luck!

Nitin John Abraham · Answer

I am in the similar situation as i'm trying to cash out refi however per the Fannie Mae Rules i don't see a way to recoup the money spent on the  remodel. i can only recoup the initial investment which means i leave my remodel costs in the property.

see below from Fannie Mae - The new loan amount can be no more than the actual documented amount of the borrower's initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points on the new mortgage loan (subject to the maximum LTV, CLTV, and HCLTV ratios for the cash-out transaction based on the current appraised value).

Brian Ellis · Answer

@Jordan Deeney I am coming up on the end of my seasoning period (6 months). It was explained to me that those are the fannie mae/freddie mac loan guidelines for a refinance (this is because I received a conventional loan at purchase). I dont know exactly how banks work, but I do know you have the ability to do a cash out refinance sooner if you bought the property with enough equity in it prior to the rehab. They would use the initial appraisal price, or sale price. If you paid cash there is no seasoning period.

Either way youll be looking at 70% LTV on a cash out, owner occupied i believe is 75%. You are correct on local banks and credit unions, they will sometimes make an exception and go higher.

Hope this helps

Jordan Deeney · Answer

Thank you @Carl Dowdy and Brian Ellis. I plan on using a Hard Money Loan mixed along with money from a Heloc on one of our properties. That sounds like a method that should land me the ability to do a cash out refinance without seasoning from a bank that allows it?

Eric James · Answer

This what I do also. Buy with cash and am then  immediately eligible for refi.

Ashley Wynn · Answer

@Andrew Postell, great info! What do you mean by "...so how do you get your cash back with a HML and a HELOC? It's basically the same strategy but you file a 2nd LIEN on the property for your cash out of pocket expenses. You will have to do this AT CLOSING though...a very important difference..."? For example, if I wait the 6 months seasoning and apply for a refinance on a duplex appraised for 200k, can I not simply finance for 140k considering I owe HML 120k and I spent 20k for costs associated with the HML (down payment, interest only payments, points, etc...) in order to pay myself back?

Jordan Deeney · Answer

Thank you @Andrew Postell. That was a very clear explanation this strategy. It sounds to be a lot easier to do this with cash or a heloc loan, but possible to do with other techniques, though harder.

Andrew Postell · Answer

@Jordan Deeney @Brian Ellis @Carl Dowdy this topic is quite involved and I hope to help a little with this subject.

If you are using a Fannie/Freddie loan with your refinance step they are good loans for their rates and terms but they do have restriction on how much cash you can take out in the first 6 months of the property.  So if you have a loan that is NOT Fannie/Freddie (aka a commercial or portfolio loan) then you may not have those restrictions...but you still might.  But there are plenty of people who use a commercial style of a loan and get money back right away.  But that rate is higher, or maybe even adjustable, or maybe only a 15 year loan (which would make your payment higher)....and sometimes all 3 of those.

So if we try to use Fannie/Freddie money because it allows us to cashflow more then we have to play by their rules....or at least play around their rules.

The first rule to understand with Fannie/Freddie money is that a "cash out" loan is not permitted within the first 6 months of owning a property...UNLESS you buy a property with cash or a HELOC.  If you purchased the property with cash or a HELOC then you follow their "delayed financing" rules.  Which will either limit your money back to the LOWER amount of 75% or your purchase price AND it will also give you a higher rate than a traditional refinance.

So I wrote a very lengthy article about how to properly structure a cash purchase HERE

If you follow that strategy you can get your money back faster and more of it at a lower rate.  And since I posted that strategy Fannie/Freddie have changed their rule so you can actually receive 85% back now.

However, that strategy is for cash purchases - so how do you get your cash back with a HML and a HELOC?  It's basically the same strategy but you file a 2nd LIEN on the property for your cash out of pocket expenses.  You will have to do this AT CLOSING though...a very important difference...but that is how you can absolutely recieve ALL of your cash back when you purchased the property.  Well, at least as long as it doesn't go above 85% of the value of the property.

Feel free to tag me with any questions.  Thanks!

Carl Dowdy · Answer

@Jordan Deeney a hard money loan would likely be secured by the property, so it would not be eligible for the delayed financing exception I mentioned.  If you can find an individual to loan you the money on a personal guarantee or secured by a different property, that would be an example of funds you could combine with a HELOC and avoid seasoning requirements.

I should also add that just because Fannie Mae says something can be done, that doesn’t necessarily mean a lender will do it. Check with the conventional lender first to make sure that you are structuring the deal to their requirements.