Cash-Out Refinancing: When and How to Do It Right
By Scott Sheldon
As this exuberant housing market takes shape, the chance to harvest equity -– to tap into idle cash -– from your home may prove to be a worthwhile endeavor. In March 2011, Fannie Mae lifted the requirement that you had to hold title to a property for six months before you were allowed to access your cash equity. The change has since allowed homeowners to acquire property and then immediately cash-out refinance to replenish liquidity, purchase other real estate, do home improvements or pay off debt.
However, while it is a viable strategy, successfully sealing the deal on the "delayed financing" is something else entirely. Here's what you need to know.
A Free and Clear Property: The property -– whether it's a single-family residence, multifamily property, condominium or planned unit development -– must be free and clear of any liens. In other words, there can be no recorded mortgages on the 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, using this strategy to buy other real estate can give you an advantage, because with cash financing, the close of escrow can be days rather than weeks, as other buyers line up financing.
Supporting Documentation: This is where things can get tricky. If you've gotten a mortgage in the past 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 true with the "delayed financing rule refinance" –- supporting documentation is key to getting the cash.
Delayed Financing Essentials:
• You can access up to 70 percent of the current appraised value or the acquisition price of the property, whichever is lower. For example, if the price of the home was $400,000, with an appraised value $425,000 -- 70 percent of $400,000 would be used, so the maximum loan amount would be $280,000. That 70 percent is applicable to a primary home, second home or investment property.
• The new loan amount cannot be more than the documented amount of the initial capital used to acquire the property, including any applicable closing costs, prepaid fees (taxes and insurance) or associated discount points.
• The rates and terms are proportionately higher. A cash-out refinance will contain an added small margin because the loan is a "cash-out." Other factors could lead to adjustments, as well -- like your credit score, or the property type you're refinancing (however, most delayed financing is sought for occupancy and investment properties).
• There can be no relationship between the buyer and seller on delayed financing loans. Sorry gang, you cannot buy the home from your grandmother 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 must 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 ability 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 Things Get Technical Fast: Properly sourcing the funds you use to acquire the property is essential. This means you'll need to provide bank statements, personal loan documents, how the property was acquired -- with every dollar accounted for. This is where it would be helpful to work with a lender who is proficient in successfully closing delayed financing deals.
Finally, while the property for which you're seeking a cash-out refi must be free and clear of liens, there is an exception. If you took out a personal loan to purchase the property, that can be acceptable, as 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 by closing time. The refinance provides a window for people looking to keep their cash liquid while at the same time conservatively leveraging real estate.
More from Credit.com:
How Refinancing Can Affect Your Credit
How to Avoid Problems When Closing on Your Home
Where Can You Get a Home Appraisal?
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