Pulling Cash Out Of Your Properties: Know What You Are Qualified For
By Paul Esajian on September 2, 2014
Before you consider pulling money out of an investment property, you need to know exactly what you are qualified for. The mortgage market is changing constantly and what you thought you were eligible for just a few years ago may not be applicable today. There was no area that was impacted more by the mortgage meltdown and changes in guidelines than investment loan programs. Between seasoning restrictions, limits on loan to value and required documentation, getting a loan could prove to be much more difficult than you anticipate.
In some respects, getting a loan on an investment property is much more different than a traditional loan. However, in many ways, it is exactly the same. What is universal on both loans is that the credit score is the first indicator of what you can do. While FHA loans can go down to a 620 score, most investment programs require a minimum score of 700, with some as high as 720. This means that even the slightest blemish can cause your score to drop below that number. You need to stay on top of all payments, available balances and everything else associated with your credit. If your score drops below lender minimums, you can forget about getting approved – regardless of how strong the rest of your application may be.
Aside from your credit score, the biggest restriction you may have is with your property seasoning. Whether you are buying or selling a flip, you need to know how long you need to wait before you can buy or sell. If you are selling a rehab to a buyer using a bank loan, most lenders will not allow it before 90 days. If the buyer is using an FHA loan, there may be additional restrictions to how much profit you can make and how quickly you can sell. If you are selling to a cash buyer, you can close the next day if you like, but lenders have specific guidelines, especially for any type of flip property.
The same applies if you are looking to take cash out in the way of a refinance. Most lenders will allow for a cash out after 90 days, and some as long as 180. Some lenders will actually let you refinance the first day after you take ownership, but will use the purchase price instead of the new appraised value. This probably won’t do you much good, unless you got a great deal on the property. The big restriction with cash out investment refinancing is with the loan-to-value ratios. Depending on the number of units your property is, you will be capped anywhere from 65-80% of your value. If you are looking to get the maximum cash out of your property, you are most likely looking at waiting six months and 80% of the value.
There are a few lenders that will offer an exception to these guidelines with proper documentation. If you want to use the appraised value you need to be able to justify the sudden price increase. This means taking before and after pictures, supplying receipts and possibly getting multiple appraisals done. Lenders have gone overboard to protect themselves from having another mortgage crisis and this starts with using the right value. The more you can document how you got the property for a discount, the amount of work you did and the after repair value the greater chance that the new value can be used. This will require more work and organization on your end but it will be worth it when you pull out the maximum amount of money. Most investors make the mistake in thinking that they will get a dollar for dollar return on the value. In some cases this is true but not with every property in every market. There are very few areas that appreciation alone will add a significant amount to the value. This means doing the right work and for refinancing purposes documenting everything you do and having more documentation that you think you will need. This is important because at current interest rates using your properties equity can be your best option for purchasing additional properties.
The single most important thing you can do for your business is to know what your options are before you get involved with any deal. If your master plan is to buy a property, fix it up and refinance it in the next month, it will not happen unless lending guidelines change overnight. If you don’t know what you can do, ask a mortgage broker at your next real estate investment or networking meeting or call your local lender. In most cases, a mortgage broker will have access to more outlets simply because they deal with more banks who can offer different programs. At any given time, a new lender could come out with a program that works for you. Even if you don’t think you will want to refinance in the near future, you never know what will happen down the road.
If you can use the equity in one of your properties to buy another, you can keep the investing cycle going and quickly build your portfolio. This will require plenty of work on your part and you will need at least 20% equity to make it happen. This can be a viable option for you, but before you consider this find out exactly what you can do.