All Forum Posts by: Lane Forhetz

Hello Fellow Investors,

I have a question regarding conventional refinancing. I am in the process refinancing a property from a HML to a 30 year Fannie/Freddie loan. Unfortunately, one of the worst things happened to me at the worst time - I had a credit derrogatory mark show up. Now, this mark is unsubstantiated (long story) and will be removed but will take 30-90 days to fix. Anyone who has had a HML knows that is expensive time.

With that said, my current score at 649 dropping over 100 points, put me at a rate of 5.75% (not terrible) but my lender is saying there is a $930 fee to pay down the rate to 5.75%. When asked about the rate, I was told that it is a Fannie/Freddie required fee.

My question is, is that correct? 

Please keep in mind, I have done this type of refinancing 4 times this year, 3 with this lender, so I am not a new customer. I also have paperwork proving the derrogatory marks unsubstantiated. Any thoughts would be helpful! Thanks!

@Joe Splitrock, thanks for the thorough information. This isn't the first time I was misinformed; so thank you for saving me a seriously bad surprise.

@Neil Sinha thanks for providing the source. Looks like I was incorrectly informed.

and thanks @Joe Splitrock for pointing it out

@Joe Splitrock, can you provide a source for that information? The 6 month reserve would be a difficult requirement to meet. Thanks!

I've spoken with multiple different local banks in my area about the Fannie requirements and I've been told that you can have 10 investments PLUS your primary home, and I've not been made aware of any 6 month reserve requirement. Only that your DTI can handle another loan (granted you can use a signed lease to increase your income from your rental properties).

@Neil Sinha, I understand. The main reason that the second appraisal is able to be done so quickly is that the first appraisal is a "subject to", meaning that it's subject-to the work to be done. I have to submit a scope of work that I will be doing to the house and the appraiser justifies the appraisal off that scope.

@Mark J., all the deals I have done have been at 75%, but I've actually heard of some people getting 80% ARV. Apparently, Fannie will allow 80% based upon some mysterious set of guidelines they have. Banks have told me that it's possible but no one has ever provided the guidelines to achieve the 80%.

@Mark J., Thank you!

I think you have the process down just as well. I used to focus on staying $0 out of pocket and I never bought any properties. Ultimately, most deals will end up with some of your money out of pocket, at least in this hot market.

I have found most of my deals on the MLS. It's been tough but it's been working pretty well. For me, as long as I am getting close to 100% cash on cash return the first year, I'm ok with being out of pocket a bit.

In order to find a HML with decent fees, you may have to put up with high fees for a deal or two until they see you as a lower risk, having completed a couple.

@Neil Sinha, I realized I didn't answer the question about the appraisal.

The refinance bank will order their own appraisal, once you have completed the rehab. So you have to pay for a second appraisal, which is a bummer, but as long as you get a decent appraiser, it's worth the extra $400-$500. 

I've had good luck with my appraisals coming in within 5% of eachother and my own estimates for ARV. I've had a couple appraisals come in a lot higher than expected. The trick is to estimate on the low end and negotiate your purchase price from that lower estimate.

@Neil Sinha, any lender should take the loan as Fannie Mae supports the loans. As long as the bank follows the guidelines.

The guidelines Fannie has put in place are:

• You can get 75% ARV in a "Rate and Terms" Refinance - meaning you can't get "cash out" of the deal.
• There are no seasoning requirements for this
• You can take up to 2% or $2000 cash out of the deal, whichever is lower
• The rates you get are competitive with normal primary home mortgages but are determined by your credit score and DTI (debt to income ratio)
• Maximum of 10 loans (plus primary home, 11 total)

I would try to find a local bank to work with. I simply did an interview-esque type of meeting and said this was what I was trying to accomplish and the loan office took my questions to their underwriter and addressed them a few days later. 

As you develop a relationship with the local bank, they will see you as a good low risk customer and do more business with you as you max your 10 allotted Fannie loans.

@Neil Sinha and @Mark J., 

Neil is exactly right. You have to find a deal with a big enough discount to recoup HML costs in the equity capture.

Here is a deal I did recently and seems pretty average for me:

Purchase Price: $72,500

Actuatual Rehab Costs: $12000

HML costs/Holding Costs/Title Fees/Closing Costs for both purchase and refinance: $7837.00

ARV: 113,000

75% Mortgage: $84,750

Now we add up all fees and costs: 72500 + 12000 + $7837 = $92,337

Subtract the bank loan @ 75%ARV: 92,337 - $84,500 = $7587 out of pocket after refi

Granted my closing to closing time was 6 weeks on this. So my holding costs were lower than average. But based on my cashflow, I will have 80% of my out of pocket costs repaid to me in my first year. That, to me, is a great cash on cash return.

Also, since the ARV is $113,000 based upon the lower of the 2 appraisals done (other was $114,000), I have $20,663 gathered in equity.

To me, this is the best way to scale your business up quickly. Yes, costs are high, but without large private investments there really is no other way to buy houses this quickly.

Next question regarding this ridiculous issue. How much should it cost to replace (with a permit and licensed plumber) the kitchen and main stack.

Another item I need to replace is the water heater, although based upon the age of the unit, I would not say it's a ridiculous requirement to replace.

Here are some pictures of these very nice looking stacks. Sad I have to replace them :(

(notice the top of the smaller kitchen stack is copper. I won't be replacing that portion but have been quoted $800. Seems pricey to me)