I’m having trouble finding a loan that can work with my situation.
Here’s the scenario: LLC comprised of two couples bought a duplex with cash in February. Rehabbed with cash to sell and it didn’t sell. Rented it out, but now want to get cash back out to use on next property. We were told by a mortgage broker we could only refinance if we took the property out of the company name and put it in the names of the four individuals. Then all four individuals would need a 720+ credit score to get 80% LTV. My problem is that all four individuals do not meet this threshold, plus when the property was transferred from the LLC to the individuals it would trigger a transfer tax and a sales commission.
Other data maybe needed: In business two years, but formed LLC 16 months ago. We’re currently working on our fifth house.
Your father had spoken to me this morning and it was I that gave hime the advice. Basically what it comes down to is that you guys were trying to operate a business as wholesalers in the residential investment world. This is typically a commercial type of business thus the use of a LLC. Now that the market has softened this business model may not be affective and your trying to get wholesale financing through lenders that make loans on residential (non commercial) properties.
95% of the wholesale lenders out there require title to be personal names; only a select few will allow the loan to be in your personal names and title in a business entity. If you want the best type of terms offered then you’ll need a conventional loan not commercial loan. This may mean that you need to quit claim the property out of the business. In my experience, I’ve never had an investor be concerned about transfer tax and sales commission when transfering the property to themselves. I’ve worked with many investors who have quit claimed from their business to themselves. Maybe it’s something specific with your state but I’d also ask your cpa.
In the lender’s eyes, a transfer from the business to personal name starts the ownership period over to day one which creates a seasoning issue. However, if the lender can clearly see that all parties within the business are the same personal parties on the new loan, they’ll generally allow a transaction like this with no regard to seasoning. It’s called continuity of title. If all parties are not on the loan application the lender gets suspicious that those left off were so on purpose because they wouldnt meet qualification standards. Which in this case, you’ve claimed would be true for getting over 75%.
A couple points to add here for other viewers wanting to make loan suggestions. The need to know that the business that you’ve owned may have not generated much profit over the last 2 years. As your dad explained, their income was helping support the business. So that will more than likely put your loan into a category of either stated income or no ratio. Really has to be calculated using net rental incomes from the other poperties and liabilities.
You’re requiring a reduced doc loan for a cash out transaction on a recently purchased investment property that just came off the mls There’s only a couple wholesale lender that would even come close to doing this.
It also sounds like your starting to reach a high # of properties. The lender that I was considering we use for you will only allow 5 investment properties along with the primary homes.
Other alternatives may include using a commercial lender. Max ltv is 75% but the previous owner (before REO if bank owned) must have been on title 18 months. Commerical rates and terms would apply though.
Have you tried speaking to the local brick and mortgage banks where the property is located? They would be an ideal source for a commercial loan as well. Probably not over 70-75% though.
Hard/soft money lenders would be able to get your loan done with vesting in the llc but at 65-75% with higher rates and points.
What about if they used hard/soft money to “refinance” the property into their name and then did a conventional no seasoning rate term refinance? I know the extra loan would cost more, but would it not eliminate the need to hope for the title seasoning exception?
More than likely would not work. Since the first loan was cash out and 12 months hasnt gone by, they’d consider the next loan cash out as well. Guidelines on this may be a bit different from program to program though.
I agree with the points about LLC vs personal names, but disagree with some other things.
First of all, in regards to the transfer tax…here in PA, this would be a 2% transfer tax transaction, so if it similar in their state, I see the potential downside.
Most local banks in my area will do an 80% cash out refinance based on appraised value without regard to title seasoning and base the qualification on debt service coverage, not individual income (LLC is not an issue there). The main down side is you are generally looking at a max 20 year term that is only fixed for the first 5 years, and that will impact the monthly cash flow.
One thing I did not get from reading the original post is whether or not the LLC is the only job that these four individuals have, or if they each have their own income streams. If they have their own income streams, and do decide to transfer the property into individual names (or start that way on the next property) there should be no reason not to be able to do a Fannie Mae 80% cash out refinance based on appraised value, since fannie/freddie do not have seasoning requirements. If you are fortunate enough that the ones with the best income have the best credit, there is no need to use all four owners that are on title, just use who you need to to qualify. The other thing to keep in mind with fannie/freddie is that the portfolio of properties owned by all individuals on the financing can not exceed 10 financed properties, so that will create a limit soon.
In re-reading while i was posting, I just caught the just off the MLS which could create an issue, but after a few months pass, this issue should go away (you will need to use the lower of the appraised value or the recently listed price).
Certainly not disagreeing with Ben, who I have a great deal of respect for after reading many of his posts, just offering other thoughts.
Fannie/Freddie have seasoning requirements on cash-outs. Rate terms are the products that don’t have seasoning. My homecomings rep says they don’t have seasoning but their rates SUCK.
Fannie has no seasoning; any normal conforming loan can be done as cash out immediately after purchase. The lender may have their own policy in place but typically most do not. Problem with Fannie loans is that most investors are not full doc and the stated program offers lower ltvs than normally needed.
Agreed, if the state has transfer taxes then quit claiming out may not be the best option if doing so will trigger this.
80% is great for local banks to make on commercial loans. Most banks here in St. Louis will barely push 75%. Maybe a little higher for existing/past borrowers that have made a relationship.
To clarify for the viewers…80% is not available for stated Fannie Mae cash out on investments. So if there is not enough income on paper from all borrowers the loan would have to be done as stated or no ratio. This limits Fannie to 75% on sfr and 70% on 2 units.
Also to point out, most lenders will not allow you to leave borrowers off the application who are within the llc. The majority will want to see who all the owners are. Lenders call this continuity of title. It would throw up red flags if only 2 of 4 members were quit claimed on.
Whether or not the borrowers need to go stated or can go full doc fannie/freddie was the question I had asked…most commonly, the investors I work with have a full time job, and if there are 4 owners, chances are good at least one or two have full time employment perhaps allowing the full doc option.
If the decision was to quit claim out of the LLC (or on a new property, just title in their own names) I would still put all borrowers on title, but not neccesarily all on the loan. This is done all the time that there are folks on title that are not borrowing the money, they simply need to sign certain docs at closing. I have never had a lender create an issue over this.
The reality is even if only one or two went on title, a fannie/freddie lender would have no issue, since they are looking at the present, not the past.
Although Fannie Mae has no seasoning for cash out on properties recently purchased I’ve only had 1 lender ok with a no seasoning refi after a quit claim.
For example:
Investor picks up property from distressed seller, will take over payments and have the owner quit claim title. Shortly after investor wants to cash out and also payoff existing first lien of previous owner.
This created issues with most lenders even when using Fannie with no seasoning.
My point here is that a quit claim from a llc to personal name is the same thing as above. Theoretically, if all borrowers in the llc go on the new loan/title this is the same entities. However, if some in the llc are left off the new loan you’re dealing with different entities.
For accuracy, I’ll call 4 big Fannie conforming lenders tomorrow to run the scenarios. Dave, if you can find a second can you call a couple yourself this week to confirm? It may be good to hear from different sources.
Term to address is called continuity of title. Thanks!