Using heloc for brrr and renovations

[Zachary Engen]

Ive read a few things about onlying being able to cash out refinance 75% or the purchase +closing costs, whichever is lower. I plan to purchase a distressed property amd do the renovations with my heloc. Once I'm finished I would just want my purchase price amd the money I spent on renovations back back...

for example, i buy a house for 100k put 50k of renovations into, house would now be valued at 250k. I would just want to be sure I can get that 150k back to pay off my heloc..is this possible? The 75% thing I've read is confusing me.

thank for any info. 

[Ko Kashiwagi]

Hi Zachary,

The constraint you are talking about may be due to seasoning requirements that some lenders/programs have. For example, if you talked to a lender that only does conventional financing (Fannie/Freddie), they have 12 months seasoning period. Meaning you need to wait 12 months from date of purchase to use the newly appraised value and base off the LTV.

In comparison, DSCR loans typically have shorter seasoning, often being 6, 3, some even 0 months seasoning. For example, with the numbers you mentioned and at 3 months seasoning, you can get 75% of 250k which would allow you to get all of the purchase and renovation costs after the refinance.

If you are looking to get the purchase and renovation costs back within 12 months, you would want to look for a lender/broker that can achieve this with short seasoning period.

[Chris Barrett]

Just make sure to find a lender you are going to refinance with first. Holding onto a HELOC long term is painful, so you'll want to make sure your exit from the HELOC is planned out.

[Jay Hurst]

Quote from @Zachary Engen:

Ive read a few things about onlying being able to cash out refinance 75% or the purchase +closing costs, whichever is lower. I plan to purchase a distressed property amd do the renovations with my heloc. Once I'm finished I would just want my purchase price amd the money I spent on renovations back back...

for example, i buy a house for 100k put 50k of renovations into, house would now be valued at 250k. I would just want to be sure I can get that 150k back to pay off my heloc..is this possible? The 75% thing I've read is confusing me.

thank for any info. 

You are correct in wanting to have your plan in place before buying something. As is was mentioned above Fannie/Freddie require 12 months before you can use the new value to walk away with cash. (no waiting period to simply refi what is owed) DSCR programs are not purchased by Fannie/Freddie so they can set their own rules and some have a waiting period as short as 3 months.

HOWEVER, very important to understand is that these 3 month seasoning products are VERY expensive. They typically have multiple origination points (meaning very high closing costs) very high rates (compared to conventional but also compared to 6 month or longer waiting period DSCR products) and almost always have VERY long pre-payment periods up to 5 years. This can be extremely costly.

We have a two step program has no waiting period at all and will end up being quite a bit cheaper then the 3 month waiting period on closing costs, rate and NO pre-payment penalty. 

[Jonathan Chan]

Quote from @Zachary Engen:

Ive read a few things about onlying being able to cash out refinance 75% or the purchase +closing costs, whichever is lower. I plan to purchase a distressed property amd do the renovations with my heloc. Once I'm finished I would just want my purchase price amd the money I spent on renovations back back...

for example, i buy a house for 100k put 50k of renovations into, house would now be valued at 250k. I would just want to be sure I can get that 150k back to pay off my heloc..is this possible? The 75% thing I've read is confusing me.

thank for any info. 

Unfortunately, ther'es no guarantee, because there are a lot of variables at play here. However, if you're running your numbers then you'll want to make sure that you're including all the interested paid for the money borrowed from your HELOC as well as the carrying costs including utilities, insurance and property taxes. With an ARV of 250K, you'll be able to pull out 187,500 less additional closing costs for the cash out refi. When I was doing the BRRRR method and leveraged a HELOC for these purchases, I was using my W2 income to put as much back into my HELOC as possible. Hope that helps.

[Stacy Raskin]

You can either immediately refinance if you paid cash which is called delayed financing. If it's an investment property, you can use a DSCR loan. For delayed financing, I've seen programs that go up to 80% LTV or 80% of what you paid and some lenders will include the closing costs you paid. Some lenders require the cash go back on your HELOC line and some don't.

If you would like to get more than the cash you paid for the property and use the new appraised value, the shortest period I've seen is 3 months of waiting period between when you closed on your last loan or transaction to when you close on your next loan / transaction.

More on DSCR loans in case helpful: DSCR loans won't use your income to underwrite the loan. DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to connect to discuss further. 

[Jake Baker]

@Zachary Engen

Most lenders will allow a cash-out refinance of up to 75% of the property's appraised after-repair value (ARV), not the purchase price or costs. Using your example:

ARV = $250K
75% of ARV = $187.5K
So, theoretically, you could refinance up to $187.5K, which would cover your $150K (purchase + reno costs) and leave $37.5K in equity.