i’m just getting started with investing and i was told by a mortgage officer that cash back at closing is illegal… I know people do it all the time though… I’m confused if she just misunderstood what i meant, or is it actually illegal?
Kristin
Your mortgage officer doesn’t know what she’s talking about!!! I’d find another one!
Mike
If you are the buyer of a property then you are not allowed to have a check cut to you through escrow at the closing of a property. This is just not allowed by the lenders.
Investors who get cash back on their purchases come to agreements with the seller that, when the property closes, they will write you a personal check. This is the only way I have ever seen it done. Again, if you try to have money sent directly to you through the closing the loan will be denied or you simply will not have the money transferred.
That is simply not correct. I have gotten a check from the bank at closing on many occasions. Small, local banks do this all the time. The key is to buy at a big discount and then borrow at a low LTV (70% or less). You can get the difference between the purchase price and the 70% LTV at closing (directly from the bank). It is not illegal or prohibited by the banks.
Mike
I think im still a little confused. This is the situatuion im looking at… I want to purchase a duplex that is listed at 36,000. It needs about 5 to 10 grand in repairs. The SEV’s are 42,000, so i’m thinking that after repairs it will be worth about 80-85k. So i would like to make an offer on the propery aroung 26,000, but get a motgage for 50,000. Then i will have enough money to complete all the repairs and a little extra that i can use for future deals.
Is it possible for me to do this legally through a mortgage company or small bank, or will i need to do a side deal directly through the seller?
Sounds like some of what you’re planning may be illegal but just normal cash back at closing is possible if it’s all spelled out in the Purchase and Sale.
I think where you’re headed into fraud is the fact you want too much money back. Having an inflated appraisal is illegal and is fraud. I think some banks allow up to 6% cash back at closing as some sellers offer to pay closing costs or for instance if there was an issue with a furnace/roof and in the P&S there was an agreement that the seller would give back a certain amount to fix it, that would be legal. If you’re buying the house for 26k, you can’t really get a mortgage for more than 26k. If you bought it for 50k and tried to get back 24k, don’t know of any banks that would go for it. It would also have to appraise for 50k otherwise the banks wouldn’t loan the money on it. Does that answer your question?
Sounds like you probably need to get a rehab loan or go HML to get the fixup money.
i dont want to do anything that is illegal… i know that the house will appraise for over 50k, that is why i thought i could get that amount of cash back… In all of the carlton sheets infomercials they talk about getting huge amounts of money back at closing. How are they doing this?
Henryinma,
With all due respect, you simply don’t know what you’re talking about. IT IS NOT ILLEGAL TO GET CASH BACK AT CLOSING. There is no 6% limit on the amount of money you can get back - you’re just making that up. There is absolutely no fraud involved in having the bank write you a check for ANY amount at closing.
Kristin,
The Carleton Sheets info is correct. All the naysayers that have posted are just plain wrong. Having said that, I have never heard of a mortgage broker that could put this together. As I’ve said many times before, you must use a small local bank - a bank that loans money for their own portfolio.
Here’s an example:
You find a house that will is truly worth $100,000 after repairs and will appraise for that with the bank’s appraiser. It needs $10,000 in repairs. You buy the property for $40,000. You go to your small local bank and tell them that you want to borrow 70% of the appraised value. Tell them right up front that you’re paying $40,000, the repairs will be $10,000 and you would like some extra money for whatever you want it for (operating expense, future repairs, a vacation, whatever). Be sure to emphasize that they will have 30% equity as collateral.
Therefore at closing, you would get a check for $30,000 (the difference between your purchase price and 70% of the appraised value). It is just that simple and perfectly legal. Beware that you will have to make the payments on the money that you borrow, so don’t borrow more than you need. Also, all of this is predicated on having excellent credit and being able to demonstrate to the bank that you can repay the loan. If you have no money, no credit, and no job - forget everything I just said.
Good Luck,
Mike
Mike is correct. The lender is securing the note based on the value of the property, not what you pay for the property.
I have a loan from Aurora Loan Service with the following parameters: 10/1 ARM, interest only, 5.65%, 65% LTV, no income documentation required. I took 200K out at closing. Nothing untoward or illegal.
MG
Local banks are a different story, they do things differently than the national lender.
It is not illegal to get the money out at closing, I just meant the lenders would not do it. There are always exceptions to the rule as mentioned above. I’m surprised that Aurora would do it though. If you can find someone to do it then do it, but it’s not going to be easy (as mentioned above).
good luck
I have yet to find a bank that will give you a mortgage on a property and then give you money to fix it up based on the after repair value appraisal. Yes some of the smaller banks will do loans to purchase and fix a property. They will do a mortgage on the property after it is fixed so they can sell it on the secondary market. Most banks willl want full documentation from the lender. They will want a very good credit score and good income coming in to pay for the loan. I have heard from 3 different bankers that this is speculation and they are real hesitant to do it.
I am doing a house with a HML to rehab and then doing a cash out refinance within two months. This scares me a little bit but it should cash flow and it should put some money in my pocket after the second closing. Hard Money is expensive and it cuts into the profits. Several brokers have commented that this is doable at 90% LTV. But 80% is much more managable for interest rates.
A friend of mine just walked into his bank and FICO score is in the 720 range and he has a good job, they just gave him a $50K credit line not tied to anything. He purchased a house and is in the process of renovating it at a good rate. I talked to this same banker and I thought she was a dim light bulb to put it nicely. My friend knew her personally which helped.
This is a good topic to talk more about!
good Luck!
NDI
thank you so much for all the great info, it has been very helpful… im going to go check out some of the local banks on monday!
I merely pointed out it could be seen as fraud. Different mortgage programs have different requirements and some will reject you if you get more than 6% back at closing. You then get another program but the rate will probably be higher. It’s very easy to commit fraud if things are done in a hidden and backhanded type of way, but it can also be done legally. As you said, if you have a good working relationship with a local bank, they may do the loan and just keep it in house. Depends how well you know the banker and how risky they want to get. I do know a bank auditor that sees these risky loans on the books all time from small local banks. I think they get scolded and get bad ratings which may make it more expensive for them to operate so I guess that’s how the government is cracking down on these types of loans.
There’s also other methods like floating the whole thing on credit cards. There’s lots of low interest rate balance transfer type checks floating around out there.
This discussion started with the legalities of taking cash at closing, non-specific to a purchase or refi. In either case it is legal. For lenders willing to do cash back loans, I suggest you Google: cash back loans.
Kristin presented a hypothetical situation in which the property would appraise (as it sits) for 50K. In a standard loan situation (70% to 80% LTV) she should be able to borrow 35K to 40K. Plenty of cash out to effect the repairs, estimated at 5k to 10K. Good luck Kristin!
Finally, you can get loans to purchase fixers which will include the repair costs in the original loan. One program that is available is called a 203 (k) and is underwritten by the U.S. Department of Housing and Urban Development (HUD). Link: http://www.hud.gov/offices/hsg/sfh/203k/sfh203kc.cfm This program is offered through specific lenders and there is a link at the bottom of the page (listed above) to find a lender.
Here is a brief transcript from the above page:
The purchase of a house that needs repair is often a catch-22 situation, because the bank won’t lend the money to buy the house until the repairs are complete, and the repairs can’t be done until the house has been purchased.
HUD’s 203(k) program can help you with this quagmire and allow you to purchase or refinance a property plus include in the loan the cost of making the repairs and improvements. The FHA insured 203(k) loan is provided through approved mortgage lenders nationwide. It is available to persons wanting to occupy the home.
Granted, this program will not work as a revolving door for the REI, but how many people do you know that might qualify for this type of loan? Be creative! Also, there are often city and county programs available with very creative financing options for first time buyers, low income buyers and those with less than stellar credit.
MG
Yes you can do it,
Or how about this,
You buy a property at a discount…65%ARV; put some hard money on it. Refi out in a month(with a lender that doesnt require any seasoning) and pull cash out.
This is your other option(the trick is try to document some cosmetic improvements to build your case for the refi).
my 2 sense
Kristin, in my opinion the answer is “Yes”, its legal to get cash back. However, most lenders have a lower LTV (Loan-to-Value) limit on investment properties than on a primary residence. If the lender is willing to give a 70% LTV on investment properties (assuming the values you stated are really correct) it should work.
You may need to get an “as completed” appraisal, to convince the lender of the future value. Your appraiser can let you know what they need (plans, contractor bids, etc.) to officially determine the future value.
Once the new value after renovation has been established find a lender who is accustomed to working with investors. The lender’s confidence in you may determine how much they are willing to lend. It seems they would definitely lend enough for the rehab if the future value is definietly 80K, but the extra cash may be a question.
If you provide a projected income/cash flow statement to the lender, that might help get the extra money. Show them that the property will support the note. Also, if you give them an idea of how the extra funds will be used (for future investment), a simple business plan of sorts, that should give them a little more confidence in you as a serious investor.
Another possibility might be to do the rehab, proving to the lender that you can follow through and make it happen. Then, do a cash out refinance of the property after completion to get money for further investing. Obviously, you want to make sure that the income from the property will support the new mortgage you’d have after the cash-out refi. This will, of course, cost you more in bank transaction fees than if they will agree to lend it all up front. But, it’s a possible plan B.
Hope this helps. My experience has been more with small commercial than residential. In that situation the lender seems as interested in the person who’s borrowing as they are the property itself. If they are confident you know what you’re doing, it goes a long way to making them feel “safe” about the loan.
“You may need to get an “as completed” appraisal, to convince the lender of the future value.”
There’s basically three ways to appraise improved real property; “as is,” “as repaired,” and “subject to completion per plans & specs.”
I am a broker and this is a very interesting topic…here is my 2 cents worth.
I work with a large conforming national lender that has a program designed exclusively for this purpose: They will lend 95% of the purchase price/ rehab costs/ and closing costs or of the ARV whichever is less. There are some requirements for obtaining this loan but it is an excellent product to use for financing the rehab costs. Feel free to inquire further for additional info on this program.
In the situation where the seller gives a personal check over to the buyer, how does the seller handle this to avoid having to pay taxes on this money, which is really never kept by them? It seems odd that they would have to. Please let me know asap, as I have this very situation pending right now.
No problem for the seller. They can just say they agreed to pay for some improvements for that amount. So they add it to thier other selling expenses which get deducted from the profit they pay tax on.