Dallas-Fort Worth Real Estate Investor Club

Hypothetical: 

I purchase a single family home for $95K all cash and rehab it for $20K. Home then appraises for $160K post rehab. I move to mortgage it with a standard 75:25 conventional loan to free up my capital and am caught by the "Texas Less than 6 Month Cash Out Refinance" rule which limits me to borrowing the lesser of 75% of the appraised value (~120K) or the purchase price + closing costs (~$97K) and am forced to leave an extra $22K in the home and take what amounts to a 60:40 loan.

Alternative:

I have the title company draft a promissory note for $75 and I borrow $120K from my LLC to purchase the property. My LLC wires ~$95K to ESCRO at closing. A $120K Deed of Trust in the name of my LLC is recorded for another $75. I rehab the home for $20K. I move to free up my capital with a 75:25 conventional loan a month later and because of the $120K Deed of Trust that is recorded the loan is now just a simple refinance as opposed to a cash out refinance making me eligible to borrow $120K (75% of the appraised value). 

What am I missing here?

Hello Rockne

Please take a look at posting (#4888103) that Andrew Postell did about two months ago.

http://www.dfwreiclub.com/page-264605/4888103?tpg=6

I think that it is along the lines of what you are saying.

Delayed Financing Exception

A cash-out refinance within six (6) months of a purchase transaction when no financing was obtained for the purchase transaction are allowed under the following parameters:

• The new loan amount is not more than the actual documented amount of the borrower’s initial investment in purchasing the property, plus the financing of closing costs, prepaid fees, and points (subject to the maximum LTV).

FOR AN INVESTMENT FIXED RATE CONVENTIONAL MORTGAGE;

1. 1. SFR, mortgage #1-6 - 75% LTV
2. 2. 2-4 unit MFR mortgage #1-6 70% LTV
3. 1. SFR mortgage #7-10 -70% LTV
4. 2. 2-4 unit MFR, mortgage #7-10 - 65% LTV

FOR A PRIMARY FIXED RATE CONVENTIONAL MORTGAGE;

1. 1. SFR, mortgage #1-6 - 80% LTV
2. 2. 2-4 Unit, mortgage # 1-6 - 75% LTV

• The purchase transaction was an arm’s length transaction
• The purchase transaction is documented by the HUD-1, which confirms that no mortgage financing was used to obtain the subject property. The preliminary title search or report must also confirm no liens on the subject property.
• The source of funds for the purchase transaction can be documented (bank statements, personal loan documents, HELOC on another property). Any loans used as the source for the purchase transaction will be required to be repaid on the new HUD-1.

  Funds received as gifts and used to purchase the property may not be reimbursed with proceeds of the new mortgage loan. Funds of gifts are not allowed with investment purchases. 

• All other cash-out refinance eligibility requirements are met and cash-out pricing is applied. This is allowed on primary residences, second homes and investment properties per cash-out guidelines.

  Ineligible Transactions

  The following transaction types are not eligible as cash-out refinances:

  • The subject property was purchased by the borrower within the six months preceding the application for new financing except if delayed financing guidelines are met.
  • Investor and second home borrowers with 7-10 properties are ineligible for cash-out refinance transactions unless all of the delayed financing guidelines are met.
  • The subject property is currently listed for sale
  • The existing mortgage is a “restructured mortgage”
  • Transactions in which a portion of the proceeds of the refinance is used to pay off the outstanding balance on an installment land contract regardless of the date the installment land contract was executed.
  • The new loan amount includes the financing of real estate taxes that are more than 60 days delinquent and an escrow account is not established. 

Freddie Mac's Guide to Refinancing, including Cash Out.

Fannie Mae's Guideline to Cash Out Financing.

This information is accurate as of the time of posting. Please also verify the accuracy of this information at the time you are considering these options as guidelines change.