Purchase vs. Purchase and Refi Loans

Is it possible to get a conventional purchase loan on an investment property that is determined by FMV and not the purchase price?

IOW, I buy a property for $90,000 that has a FMV of $125,000. It seems I can only get a loan for the purchase price of $90,000, and THEN turn around and get a refi loan for the FMV. For example, I buy for $90,000 and then get a refi for 90% of FMV, or $112,500, putting $112,500-$90,000= $22,500 in my pocket. Can I (or why can’t I) just get a purchase loan for 90% FMV at the beginning and cut out a second closing (and all it’s associated costs)?

Nobody? :frowning:

All lenders use the lesser of the purchase price and appraised value. Which is 99% of the time always the purchase price. You will have to buy and then do a no seasoning cashout refi.

Thanks zach. I’m wondering if it’s not better then to get a HML in some instances like DHLC says. You pay more in points and interest, but save more in all those “junk” fees.

Not sure how that would be of any benefit to you, as far as i know they will only go to 70%. That would not even cover the purchase price.

Right. However, they typically do 70% ARV and not 70% purchase price. Often, this can put more money in your pocket. For example, if the ARV of a house is $125k and you can purchase it for $80k …

Conventional: 100% $80,000 (purchase) = $80,000
HML: 70% $125,000 (ARV) = $87,500

Yeah, but considering the fact that hard money lenders usually charge 5 points or something ridiculous up front, is it really worth it to put $7500 extra in your pocket? And you usually have to pay back the HML in a short time, say 6 months, so when you do the refi into a conventional bank loan, you will have closing costs similar to when you buy the property anyway.

I was going off you’re example of a purchase price of 90k. With that example an 87,500 loan would not cover the purchase. And Rbaxter explains further why it doesn’t make sense.

I’m glad I ran across this conversation…

Say I’ve found a property that’s about to go to auction – comps are running $220,000 and the loan amount is $132,000.

After I’ve put down the deposit, say 10%, and I wanted to use a HML to secure the rest – I can only get a loan for $154,000 ($220k x 70%) ?

Depends on what state you’re in? The particular lender we are talking about is only in tx, co.

I’m in Virginia.

Most, not all, of these lenders that go off the appraised or completed value after rehab, there programs are designed to cover the purchase+rehab work, they are wanting to see that there is an improvement in value taking place. They are in the pursuit of improving properties across the country or in there area, not helping investors make a quick buck of an unfortunate situation of the previous owner (no offense intended). Im sure there may be a private lender who might meet you’re particular request to 65-70% but I am not sure of any for that state.

Yeah, but considering the fact that hard money lenders usually charge 5 points or something ridiculous up front, is it really worth it to put $7500 extra in your pocket? And you usually have to pay back the HML in a short time, say 6 months, so when you do the refi into a conventional bank loan, you will have closing costs similar to when you buy the property anyway.

Correct. I’m not saying it’s the best thing for every situation, moreso, it can be good for specific needs. For example, a HML can close in a matter of days as opposed to weeks with a traditional lender. HML’s charge high points and rates, but typically don’t charge extravagant fees like traditional lenders, either. HML’s don’t care so much about your credit or debt ratio or how many outstanding loans you are servicing as most typical lenders do. And so on. It’s just another tool that has it’s place.

If you can find private money, that is much cheaper than hard money. Your local REI clubs should have private money investors.

Beemnseven,

In Virginian you can get a 70% arv loan through a HML. Score not a factor, no income or asset verifications.

Just like the example you referenced earlier.

As far as using HML vs Conv, each scenario is different. For smaller loan amounts of $70K and under, the costs for hard money may come out close to conventional. With conventional, you not only have all of the lender fees, there are also broker fees. And most the brokers here know they’ll be higher broker fees on those because less yield spread can be paid by the lender.

Investment Loans & zackj,

Thanks for the info. It seems that the main advantage with HMLs is the ability to get the money fast. In my example, the auction is scheduled for Wednesday (Aug. 30) There’d be no way to get money that fast from a conventional lender – it might even be too late for a HM lender.

But, and this is really a question about foreclosures, if I can ONLY get 70% arv, then that cuts down my bidding room by quite a bit if rehab costs are factored in as well.

In other words, let’s say I’m able win the bid for $140k. With a loan from a HML for $154K (maximum 70% x 220k), that leaves only $14,000 left for repairs and holding costs. Add this to the fact that with foreclosures, there’s absolutely no way to find out what kind of rehab costs you’re dealing with until you set foot in the house.

Have I missed anything?

Yes that makes it tough with the limited time. And if you cannot cover the purchase and rehab with a 70%arv loan than its a really tight deal and there’s likely not much room for profit in it for you with all the pts, holding costs and realtor costs factored in.

Say, that reminds me of another question. With regard to the points, are they due up front, or can they be financed in with the loan and/or due upon payoff?

As far as I know, you can choose to do it either way. Pay the points up front OR finance it into the loan. However, that 70% LTV will have to cover your down payment AND the closing costs if you finance it into the loan.

Varies from lender to lender. Most will want taken out of the initial loan upfront at closing. Some will take at payoff but will charge more points. There also some lenders that want monthly payments taken out upfront too. That will cut even more into the deal, however, it helps with cash flow during the rehab.

In your scenario the #s would be off. Most of the deals we see have a purchase price between 55-60% of the arv.