How do I cash out 80% of Appraised Value on a Foreclosure Rehab?

Question

Hello,

I purchased a foreclosure property at tax sale in Michigan in July of 2012 for $88.5K, and put $80K into the renovation with cash borrowed from family members. After the renovation was finished in January I went to my local bank to get a mortgage in order to pay of the cash-loans, and everything seemed to be going very smoothly to do a conventional 80-20 LTV (this home was to be my primary residence). The bank had the house appraised, and it was valued at $214K. My loan officer then sent my completed file to the underwriters and they kicked it back saying that I have to wait a full year from the date the deed was recorded in my name before I can cash out 80% of the appraised value. At this time they said I would only be able cash out 80% of the purchase price plus documented repairs. I have some questions I'm hoping the pros on this board can answer.

1) Can I put the property on the market and sell it to another buyer for appraised value or will they run into the same problem if they try to mortgage the property?

2) Is the 12 month seasoning period a law or just a common policy banks follow?

3) Are there any banks out there that would do an 80-20 LTV refi using the appraised value?

Any advice would be very appreciated.

-marc

Marc M. · Answer

Hi BP'ers,I've been meaning to send an update on this old post for too long now! I just wanted to follow up and say thank you for the support and advice on this particular deal. The closing went according to plan although I had to provide an enormous amount of documentation including letters from my private lenders as proof that they funded the renovation. The bank required that the cash from closing be wired directly back to them as a safety precaution instead of letting me disburse the funds :-)The second appraisal came in at $230K so I was able to cash out for $184K @ 3.625% for 30 years. My total mortgage payment (incl. taxes / insurance) is $1289/mo. and the property is rented for $1900/mo. I just had it appraised again in February 2015 and it's up to $260K, so all in all this has been a good investment. Best,Marc

Jon Holdman · Answer

They may bring in appraisers from far away. I've certainly seen that around here. You should be there when the appraiser comes. Have lists of what you did. Provide comps if you have some. Show him or her around and point out what you did to the property.

Marc M. · Answer

Thank you all for the excellent advice. I called every local lender in Ann Arbor, MI to ask about their seasoning period for an 80% of appraised value cash-out-refi, and at least half of them didn't know their policy and asked to get back with me once they checked and the other half said 1 year was the waiting period. However, one lender said with confidence that he could do it since I'm past the six month window (and close in 30 days) During a second phone call he confirmed that in the latest (RMI? Manual...not sure if I heard him correctly..) the seasoning period is definitely 6 months and not 12 months as it once was just a few months ago. He said the policies do change rapidly enough that many banks are not up to date with the latest standards. I'm still going to hold my breath until it's a done deal, but he says we can close in 30 days, no problem. The only downside to this is that I've lost my locked rate of 3.625% with the other lender and the appraisal they just did. I asked if I could use the appraisal that was done two weeks ago and he said that banks can no longer request appraisers and instead have to assign appraisers randomly....so if the appraiser I used happens to come up when the computer makes its selection I can use the existing appraisal (which could be likely since there are only 5 or 6 active appraisal companies in town) I also asked about the option of just selling the property to someone else, and he said that a 90 day seasoning period is all that is required along with documentation of repairs. This seems contradictory since I am essentially trying to do the same thing as a would-be purchaser, that is, buying a renovated property and financing it with a mortgage (the only difference being that I already own it outright) This new loan officer said the reason the seasoning period is different is because lenders are afraid that someone in my shoes could potentially walk away from the house once 80% of the cash was taken out of it, and the would-be purchaser has more of an incentive to actually keep the property. He also mentioned that Fannie and Freddie will rescind mortgage broker's commissions on properties that were mortgaged with a cash-out-refi if the mortgagor turns around and sells it within 6 months after close, which is yet another newly enacted policy to discourage flipping. If all goes well, I will close by April 15th. I will let you know how it turns out! Thanks again. -marc

Jon Holdman · Answer

I've ran into this, too. It can be deal with by having your lender create an LLC, put the money into the LLC and then having the LLC be the lender. So, so I was told. Didn't end up doing a loan with the lender that brought this up, so perhaps it was just an excuse. The last one I did with this was done via a local, non-bank mortgage company. They make the loan themselves, but then immediately turn around and resell their loans to Fannie Mae. But they're not a bank, so not subject to the same rules as bank. They're just here in CO. So, look for a local lender in your area rather than banks. You may still not find anything, but you have a shot.

David Beard · Answer

I assume you're trying to get a conventional loan to lock in the long term fixed rates (not a portfolio loan with a local bank). Was the renovation loan secured by a mortgage on the property? This will determine whether it's a cash-out refinance or a no-cash-out refinance. The latter is much preferable as far as seasoning and LTV, and would require the rehab loan to have been documented with an actual recorded mortgage. Although in truth, many lenders want the loans to have come from an institutional source, and not individuals, to consider it a no-cash-out (even if a mortgage was recorded).

Dawn Anastasi · Answer

Warning however that when you search, it will be like looking for a needle in a haystack. (Well, maybe a little harder than that.) I have been looking for months. I finally settled on one that will do the appraised value versus only lending on the purchase price, but they made me wait for that year seasoning.

Dell Schlabach · Answer

We use a local lender, and they are willing to lend up to 80% of appraised value., no srasoning required. Check with a couple smaller local banks or credit unions. To answer your other question, no another buyer of your property would not have the year wait issue. Some bank's may require 90day if and if it is less than 6 month they will likely require two appraisals, and they will likely ask for a list of improvements made and costs. We run into this all the time. I will just type a one page document with a list of improvements and ballpark prices, always seems to suffice. I suggest you keep asking until you find a lender who wants to do business.

Jon Holdman · Answer

1) Depends on the lender. Some do have seasoning requirements, though 90 days is more typical for a sale than a year. 2) Not law, AFAIK. But I've been told it is an FDIC policy. 3) Its been several years but I did do one at about 70% LTV after six months. It was by a local lender who resells their loans to Fannie Mae. So, you may have better luck with a non-bank lender. If you're actually looking for a lender, please post in the Marketplace forum, though.