Just a quick question regarding cash back at closing. I know that many lenders will loan 85-100% of the appraised value, and I have been told by some local investors that they will get the equity back at closing when they buy a property at 70% of the appraisal. I was under the impression that a buyer can only get up to 6% cash back. How do you get around that? Is there a legal way to get all the cash back at closing? I know there are some lenders that will escrow repair costs and release them as needed, but I would of course rather get the all the cash up front if possible.
There is no legal way to accomplish this except if a lender has a specific niche program for cash back at closing, but I personally don’t know of any.
From the lender’s perspective, if you are buying the house for 70% of the appraised value, let’s say you are buying it for $70,000, but it appraises for $100,000, the lender will base the loan-to-value ratio off of the $70,000 sales price. So in this example, the lender would consider your $70,000 loan to be a 100% financed loan despite the higher appraised value. A lender will not allow you to borrow more than 100% of the value when you buy the house except for some programs which allow for closing costs to be financed because from the lender’s perspective, if you can’t make your mortgage payments, you will be unable to sell the house for more than you owe. You are in their eyes a foreclosure waiting to happen.
Why won’t they take the appraised value to calculate loan-to-value ratio? Because in their eyes, why would someone sell you the house for $70K if it is worth $100K? Either there is fraud going on or the house is actually worth only $70K. After you have owned the home for at least a year, all lenders will then allow you to refinance using the appraised value, and at that time you can easily borrow more than what you originally borrowed.
Personally, I don’t even know of any lenders who will allow the 6% cash back that you mentioned- I have not heard of this.
I hope that helps…
RJ,
I see from your signature you have left Prime Lending. What made you decide to leave?
What do you want the cash for? I get cash back on every deal. It is like rbaxter said. I buy the house around 70% of its after fix up value. I get a mortgage for the purchase plus fix up costs (90% of the after fix up value). After each item is fixed up the mortgage company cuts me a check for that item on the list. At the end because of the skill set on project management there is always money left over. But it was not just money for nothing, I had to fix the property and that left over money was basically my fee for being my own general contractor for the fix up. My average fix up bill is $8,000 and my average money left over is $971. By the way, I always find another $400 or $500 of “nice to do” things that I just throw in because I have the money. So I really end up putting almost all the left over money into the house.
Bluemoon, it sounds like you are referring to a construction loan/renovation loan… that would be the way to get some extra cash for repairs.
Another thought is a 125% product. Not the greatest rate, but it would allow you to leverage the :evil out of the property.
Other than that can’t think of to many other ways to get money back at closing. At least, I’ve never had a client get cash back. Typically, the 6% cash back for closing, is for closing costs, and can’t come back to a client in the form of cash (only up to their initial deposit can they get back).
If there was something, it would probably be in the form of a portfolio lender program or maybe in a foreclosure situation where you were able to negotiate the outstanding liens down so much that there was significant equity left over… I"m reaching here though, someone else would be more qualified to speak about better than me if it is a possibility.
As far though as conventional and government products, they look at the lesser of the appraised or sales value when determining LTV’s and corresponding loan amounts.
Beyond the allowed seller concession, there is no legal means of getting cash back at closing without committing some level of mortgage fraud.
FYI…
3% is the usual allowance for NOO funding
6% is the usual allowance for OO funding
- There is a program that allows for 9% seller concessions
The 125 LTV loan referenced by another poster can not be used for cash back; restricted to closing costs and lender approved debt consolidation.
Regards,
Scott Miller
Oh, there is one other way to get cash back, but it’s rather obscure and requires a bit of work.
If you’re a real estate agent, you can get your own commission on the sale. That can be an additional 2.5-3% at closing. Of course you do have to pay taxes on it if you get it as a check so I just have it applied as a credit to reduce the purchase price.
C’mon guys. if you know of a LAW that prohibits cash back at closing, put it on the table. IT IS NOT ILLEGAL TO GET CASH BACK. :banghead
I have gotten cash back from 2 small local banks. They keep their loan in their portfolios. I told them right up front what I was doing. I bought the properties at a huge discount and then borrowed 70% of the appraised value, with the bank using their appraiser. They had 30% equity for collateral and I got my cash back. That is NOT fraud and there was nothing illegal about it.
Mike
Mike,
You are correct it is not illegal to get cash back AS LONG AS the lender is aware of the situation. However you will not find one conventional or non-prime national lender that will complete a transaction if they know that the buyer is getting cash back. Small local banks maybe, but everyone knows that local banks only lend money to people who either don’t need it or to people who fit perfectly into their lending criteria meaning full doc high fico loans. Everyone else has to go to regular conventional or ALT-A, or non-prime lenders who DO NOT allow cash back at closing.
Yes, there is a legal way to get cash back at closing. It’s done all-day, everyday, in different parts of the country depending on what the market is doing. When sellers lease a property back from you they can pay the entire lease agreement in full AFTER the closing, not AT the closing. You could get stiffed, but that’s a risk you decide whether or not you’re willing to take.
There is a hard money loan that allows for cash back at closing…
Rather then lending on the lower of either the purchase price or the appraisal; the LTV is based upon the higher of the two numbers.
If the spread between the purchase price and appraised value is wide enough, this program allows for 100% financing + cash back at closing.
Regards,
Scott Miller
I have not done this personally, but I have been talking with a friend of mine that does foreclosure buying and she actually buys the homes for below market value and then takes out the equity by doing an equity line of credit with the bank at the same time. Now keep in mind she does this to make it look good on her credit report by not ever using the money, but hey some of you savvy investors I’m sure could find a way to use this for funding other investments…
@ 70% you can get 9% to closing costs however there are also programs that allow for purchase rehab as well as other ways to make the cash available.