|A cash-out refinance – no wait time
As this exuberant real estate market drives the housing sector, the chance to utilize home equity may be a smart move. Rewind to March 2011: Fannie Mae lifts the guidelines surrounding the six-month “hold time” (time holding title to a property), allowing cashing out of a recently acquired property.
The change has since allowed homeowners to acquire property, then immediately cash out refinance to replenish liquidity, purchase other real estate, do home improvements and pay off debt, etc.
However, while the pitch sounds attractive, successfully sealing the deal on the delayed financing is something else entirely.
A free and clear property
Property can be a single-family residence, multi-unit property, condominium or PUD (planned unit development). It must be free and clear of any liens. In other words, no recorded mortgages on title. Essentially, you can pay cash for a house then turn around and immediately do a cash-out refinance without having to wait six months as previous guidelines required. In a competitive purchase market with multiple offers, this can be an advantage over other buyers using purchase money financing because the close of escrow can be days rather than weeks as the would-be competition lines up financing.
This is where things can get tricky. If you have taken out a mortgage loan in the last three years, you’ll know the level of documentation and scrutiny underwriting gives to supporting documentation, as well as credit, debt, income and assets. Such is the case with the delayed financing rule refinance, supporting documentation dictates your ability to get the cash or not get the cash. It’s that black and white.
Delayed financing’s musts
• Can access up to 70 percent of current appraised value or the acquisition price, whichever is lower. For example, the price of the home is $500,000, appraised value is $525,000, 70 percent of $500,000 would be used, so the maximum loan amount would be $350,000. Seventy percent is applicable to any occupancy status, including primary home, second home or investment property.
• New loan amount cannot be more than the documented amount of the initial capital used to buy the property, including closing costs, prepaid fees (taxes and insurance) or associated discount points.
• Rates are proportionately higher. A cash-out refinance will contain a small margin because of the fact the loan is a “cash-out,” other adjustments could apply to other factors as well, i.e. credit score, property type, but mainly occupancy. Investment property is most popular on delayed financing.
• No relationship between buyer and seller on delayed financing loans. Sorry gang, you cannot buy the home from your mother with cash then re-mortgage immediately. This would revert back to the full six-month hold time. The relationship between the buyer and the seller needs to be at what’s called an “arm’s length.”
• If the original seller of the property was an entity such as an LLC, principles of the LLC must be documented with their authority to sign on behalf of the entity.
• The final closing statement from the recently acquired property must be provided, also called a HUD-1.
This will support the fact no other liens were used to acquire the property.
Where it gets technical
for most lenders fast
For the reasons we are about to provide, working with a lender extremely proficient in successfully closing delayed financing refinances becomes a must.
• Sourcing the funds used to acquire the property as previously stated is essential. What we mean: providing bank statements, personal loan documents and how the property was acquired with every dollar accounted will be needed.
• Gift monies are not permitted on the program. Earlier we discussed no recorded liens can be on title when applying for the delayed financing cash-out refinance. While this remains, if you took out a personal loan to purchase the property, that can be acceptable so long as the terms are provided and the personal loan is paid off through the proceeds on the new loan being sought. The same goes for any other loans between parties used to purchase the property. They must be paid off through the net proceeds come closing time.
The delayed financing refinance provides a window for people looking to keep their cash liquid while the same time conservatively leveraging real estate.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.