Lender won't let me cash out refi!?

Question

Hey all, Could really use some help here!

Still trying to get these 2 properties refinanced and cashed out and having some problems!

I have a primary residence in TX and a townhouse condo second home in Rhode Island.

Trying to just refinance the TX property and lower my rate/monthly payment. Then wanted to cash out refinance the RI property, to use the $ to fix it up a bit/pay debt/and potentially make a down payment on another property

I have a lender for the Tx refinance going now, but they only work in TX. Lenders for the RI cashout refi have either been giving me the run around, saying my debt to income is to high and/or trying to get me to roll the remainder of the RI loan into a new loan on the TX property!? ugh

They are also saying if I don't roll it over into the new loan, I should list it as a rental on my 2020 taxes and try again then!? Because they say they won't approve the loan due to debt to income being to high...

The RI properties mortgage is paid for by my family that lives there, but I don't make profit off it, so I have never listed it as a rental property on my taxes. Was that a mistake? I was told NOT to list it as a rental on my taxes long ago...

These other lenders have me confused and not sure who to listen to?! Have you ever even heard of rolling one mortgage into another before? I had no idea that was even a possibility.

@Andrew Postell  any ideas?

Sorry if thats confusing...im confused too lol

Thanks for your help and time!! Hope all is well!

Anthony Thompson · Answer

@Tim O'Keefe, I understand a little better now.

There are still a bunch of moving pieces but one of the bigger issues is that they're counting the Rhode Island home's mortgage payments against you because you have no rental agreement in writing obligating another party (your family) to make rental payments.

So as far as the bank is concerned, every year your family gives you a "gift" that happens to pay that year's mortgage, but they could stop at any time. You and I know they won't do that, but I understand where the bank is coming from.

Their position is, there's no rental agreement and you haven't been treating it as a rental on your tax returns, so they're not considering it a rental property and not considering anything your family gives you as rental income to offset the mortgage obligation.

On the general point though, the new lender's proposal of taking a bigger primary residence loan and paying off your second home, yes I think it would benefit them (bigger loan amount and more interest), but I also think it would benefit you.

Think about it this way, right now you're paying 4.5% on 67K and 5.25% on 180K, or over 12K in interest a year. With the proposed refi, you'd be paying only 2.875% on the same amount, just over 7K a year, for a savings of about 5K a year.

Even though it benefits your new lender, I think it also benefits you, and in some ways it makes more sense since you'd probably get a better rate on a primary residence loan than you would on a second residence loan.

Something you might want or need to consider though, is what happens when your second home mortgage goes away. Does your family start paying you rent? Do they just start living for free? Do they make the same payment they were making, but to the new mortgage company (maybe sending it to you so you can send it in with your check)?

It might be a discussion to have now before you pull the trigger on the new arrangement, especially if it's going to mean the loss of their effectively paying you ~3K/year (by their paying the current mortgage).

The question of whether you can pull cash out is separate in a way, and really up to the lender. I know lenders are starting to get cautious on home values and cash out refis in particular since they were associated with a lot of defaults in the great financial crisis. People and institutions have short memories, but apparently not short enough to forget that lesson.

Even if you can't pull cash out, the math seems to argue in favor of doing the deal (rolling both mortgages into a bigger primary residence mortgage).

Just be sure to discuss it with your family first since they're effectively part of the equation and you don't want to be caught by surprise if they say, "great, no mortgage on the property means no payment needed from us."

Anthony Thompson · Answer

@Tim O'Keefe it's a little unclear what you mean (or they mean) by "rolling one mortgage into another", but I'm thinking they might be referring to having one mortgage secured by both properties, which is sometimes called a "blanket mortgage".

There's nothing inherently bad about that and if it lets you get the deal done you might want to consider it, but it does mean selling one (but not the other) down the line is a little more complicated. It would require a "partial release" and might require going through a lot of the loan qualification BS before the bank approves.

As far as listing or not listing the property as a rental, I'd get a second opinion on that from a tax person (CPA/etc.) because there can be a lot of factors involved. I'm guessing right now it's considered a second home, and TBH I've never had one of those for tax purposes so I can't speak very well to that vs. a rental.

Off the cuff I'd guess that rental losses (which you'd probably have, especially with depreciation) on that property would be very helpful to you, possibly offsetting offsetting some of your earned income (depending on how high your income is). When you sell you'd get depreciation recapture of course, but the usual rule is that money today is worth more than money in the future (whenever you decide to sell).

And often what makes sense from an income tax purpose can be detrimental for getting a mortgage or refinancing. The classic example is people who work "under the table" and pay no tax (illegal of course, but just for illustration purposes), and then want to buy a house and are asked for their tax returns... which show no income! So ironically, very often showing more income and paying more tax which is generally a bad thing, helps you out when banks consider loaning to you.

The gist is, it's a complicated topic and if you feel you might not have gotten good advice before, it's worth getting a second opinion from someone else, especially someone who's willing to explain things in a way you'll understand.

Tim O'Keefe · Answer

@Anthony Thompson Thank you so much for the detailed response! Appreciate it so much! I am still learning here at bigger pockets, so many knowledgeable people sharing!! Its awesome!

It sounds like I really need to research on why I should use it as a second home or Rental property. I see what your saying about the banks not "seeing" it as income that way. I always thought I was doing the right thing, but may have shot myself in the foot huh? Time to find a good local CPA. Maybe I can find a local lender who is more understanding of the situation to help.

I think I finally wrap my head around the math of it, for the larger loan. While that does help me long term, the main point was cashout refi to take $ for home improvements, minor debt relief and eventually $ towards a down payment on another (3rd)property for my mother. So simply money now to turn into more money later idea.

Does that makes sense or just should I scratch that plan for this deal!?llol

Thanks again, really helps talking to the pros here!!

Tim

Tim O'Keefe · Answer

Hey @Anthony Thompson thanks for the quick reply! Sorry if its not clear, I don't fully understand it myself! lol But from what I gather, the new lender wants to pay off my 2nd home and absorb the remainder in to my primary loan. So theres ~ 67k left on my 2nd home and the want to add it to my primary residence home loan. So they would payoff my second home loan take the ~67k @ a 4.5% rate and refinance into my primary which is ~ 180k at 5.25% rate and turn that into a ~260k at 2.875 % rate new 30 yr loan.

It sounds interesting but confusing to me. It looks like a long term decent idea, but i've never heard of it and am not sure if its just a clever way for the new lender to get my business without my best interest in mind.

I really just wanted to refinance my TX primary home and then cash out Refi the 2nd RI home. But this lender says my debt to income won't allow them to cashout refi my 2nd home. I tried to show them that the mortgage is paid for by my family every month for years but because I don't show it as income(rental property) on my taxes it seems to be a problem? SHould it be? Should I have been claiming this as a rental all these years?

Thanks for any help

Tim

Dan Weber · Answer

I would go to your local bank that you do your most banking with and ask them about a portfolio loan. These are designed to hold more than one property under one mortgage.

Lender won't let me cash out refi!?

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