Are most all Refi Cash Outs the same?

Question

I know there were be slight rate and point differences, but is there anything else that makes one Refi option better than another for Cash Outs?

River Sava · Answer

Hey Tyler, It really depends on several factors, including the property value, LTV, DSCR, and FICO score. Seasoning periods can also play a significant role in determining which refi option is best for a cash-out. Each of these elements can impact the overall terms, so it really depends on your specific scenario. That being said, do you have a specific property you are inquiring about?

Nate Herndon · Answer

Happy to assist @Tyler Carter. I've even had the chance to secure cash-out refinances between 6.00-6.50% lately - keep an eye on the 5-year treasury, as 720+ credit and $100k+ properties will be eligible for rates that are about 2.5% over that daily treasury rate. Great discussion you generated here for those looking to learn more about cash-out refinances.

Erik Estrada · Answer

Hi Tyler,

You may want to consider a 1 year or 2 Year PPP if the goal is to refinance again. I am seeing rates in the high 6s at 70 LTV with an excellent FICO

Tanner Lewis · Answer

Since you are here on the BRRRR forum, the biggest thing is cash-out seasoning time. Conventional loans have a 1 year seasoning for a cash-out, and most DSCR lenders do cash-out refi with 6 months of seasoning. There are also a few options out there with 3-month seasoning requirements.

Jay Hurst · Answer

@Tyler Carter  Seasoning for value is not understood by a lot of investors before they start on a project and it should be. Seasoning is just the lending industry jargon for a waiting period. For example, on a conventional loan, you have to wait 12 months from when you purchased the property to use the NEW value to walk away with cash in hand.  So, again, this only applies to using the new value for cash out.

DSCR loans seasoning period depends on the individual program (and there are hundreds with slight differences). Some require the same 12 months wait, most require 6 month wait, and others only require 3 months seasoning. But, generally speaking the 3 month seasoning products are pretty terribly priced with 3-5 year pre-payment penalties.

We have a 2-step product that requires no seasoning for either conventional or DSCR. So, you would want to have a plan ideally BEFORE you buy the property if pulling cash out is part of the long term plan.

Nate Herndon · Answer

Hi @Tyler Carter -

Program guidelines can differ, and though many programs are similar in what they offer, knowing your specific implications in a deal can help pinpoint the right program. Here are a few things that might go into my consideration for one program over another when selecting the right program for a client.

There are a lot of pitfalls with each unique loan program out there, so it's all about threading the needle with the "most right" selection the first time around.

• Is the property leased? If yes, is the rent that is received greater than market rents? If yes, do I need extra credit for the market rents to meet DSCR requirements?

There are programs that will give credit for 110% of market rents when the actual lease is higher than the appraised market rent value.

• What DSCR ratio do I need to hit?

Some programs require a break-even 1.00 DSCR, while others need a 1.10 or 1.15. Even still, rates may be lower if the cash-flow exceeds 1.40+. Some programs will give 65% LTV for a 0.75+ DSCR (aka negative cash-flow).

• What is the property value and loan amount?

Some programs require a $100k value (or loan amount) minimum, so I need to stay flexible with a program that offers $75k minimum value and $50k minimum loan amounts.

• What is the property seasoning?

Properties need to be seasoned with most programs in order to take cash-out at the appraised value, with the quickest options requiring only 90-day seasoning to receive a cash-out.

• What is the guarantor's credit score?

This will determine the available rate and leverage that a borrower can get.

• Does the borrower have cash reserves, or do I need to use a program that gives credit for the cash-out funds towards the reserve requirement?

If a borrower is low on cash reserves, but still needs to show 6-9 months of PITI in the bank, a program that gives you credit for your cash-out funds towards the asset requirement is extremely helpful.

Connor Hibbs · Answer

The main things that will distinguish Cash-out DSCR loans from each other are the pricing factors in their guidelines.

1. MAX LTV's offered and what may lower LTV. Some lenders require a 1.2 DSCR for max LTV and some require a 1.0. Some will cut LTV if the property is going to be an Air BnB/ STR and some lenders don't mind.

2. How to lower your rates. Most offer rate buydowns, but how impactful are the buydowns. Does lowering your loan size lower your rate? Other than FICO, which is universal in the space for rates (outside of lenders who don't use credit), what other factors can you use to lower your rate.

3. Points vs. Fees. Some lenders are much more expensive than others and boast a lower rate due to that. An example would be if Lender A charges 0 points and has par pricing of 7.2, but Lender B charges an automatic 1.5 points for all loans but claims a par pricing of 7. Some lenders may sell that they don't charge points but have several points worth of fees to make up for it.

3. Prepayment Penalty Period. Longer/ Higher Prepayment Penalty Period tend to yield lower interest rates, but if you want to refi in a few years because you think rates will go down then you'll be better off avoiding the penalty and going with a lower PPP.

Tyler Carter · Answer

Thanks everyone.  I have had the SFR investment for about 6+ years now so seasoning shouldn't be an issue.  Also, great reminders about prepayment penalties as I figure I might want to refi this one again in a couple of years.  Current LTV on the property is about 40% and after the refi would be ~70%.  Thanks again for the suggestions

Are most all Refi Cash Outs the same?

Most Popular Reply