Hi all,

I am trying to refinance my 5th property, an investment double non-owner occupied.  The property was purchased in June 2010 for $205,000, financed 100% by my local bank by taking seconds on all my other properties and a first on this one.  I have since rehabbed the property ($16,000 and lots of work) and rented it out for $2,800/month.  Not yet reappraised, but it should be worth about $310,000.  I don't know my debt to income, but the bankers says it's "fine".

I now want to refinance the $205,000 ( plus closing costs, fund escrows, etc. if possible, but no cash out ) with a 70% LTV 30 year fixed rate conforming loan.  The problem is that B of A won't do a 5th loan at all and my local bank that deals directly with Fannie Mae says, because of the recent purchase, the LTV must be based on the purchase price so I can borrow only 70% of $205,000.  Their suggestion is to wait until after one year, and see what happens.

That's not what I wanted to hear, so I googled and found this Fannie Mae Q&A from August, 2010, that seems to be written especially for me:

https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/pdf/0822faqs.pdf

So my question is:  What up?  Does this apply to me?   I did this exact transaction with my 4th property after six months with no problem (B of A) just before buying the 5th property -- Is the rule different for the 5th property?  Which "appraised value" are they talking about, at purchase or today?  Is there hidden "appraisal or purchase, whichever is lower" that I don't see?

Thanks for looking,

Rick

We can fund your deal get back to us on fundingexpertslimited@consultant.com No Upfront

Thanks

Martins Bagwel

Finance Director/Loan Consultant
FUNDING EXPERT LIMITED
EXCHANGE BUILDING, 66 CHURCH
STREET, HARTLEPOOL
CLEVELAND
447024017585

I got this response in an email ...

We can fund your request. Get back to us with your programme and all documents We don't charge due diligence fees as most lenders on do, our processing officers are ever ready to attend to you. Email us with your information we are direct lender no broker no man in between we are direct. We lend in all states as well as international we close you loan in less than 10-15 working days depending on your package. Get in touch so we can get started Email  contract, and executive summary to fundingexpertslimited@consultant.com
Regards
Martins Bagwel
Finance Director/Loan Consultant
FUNDING EXPERT LIMITED
EXCHANGE BUILDING, 66 CHURCH
STREET, HARTLEPOOL
CLEVELAND
447024017585

However, I am really interested more in understanding the solution rather than sending personal info to someone who writes like a Nigerian scammer.

Can anyone explain what is going on with my loan?

Thanks, Rick

i BELEIVE YOUR ISSUE IS NOT THE SEASONING OF THE PROPERY BUT RATHER THE NUMBER OF PROPERTIES YOU CURRENTLY HAVE FINANCED WITH FANNIE MAE.  THE LIMIT IS 4 .

Jon,

Thanks for answering, but I don't think that's the problem.  I know at one point the maximum was lowered to 4, but shortly after that it went back to 10.

Announcement 09-02 

The Eligibility Matrix of the December 1, 2010 version of the Selling Guide has a footnote about investment properties on page 2.

Footnote 6 says (on page 3):

     Borrowers who own five to ten financed properties are subject to the following additional eligibility requirements:

Second home: purchase – 75/75/75% LTV/CLTV/HCLTV and limited cash-out refinance – 70/70/70% LTV/CLTV/HCLTV

            -   Investment property: purchase – 1 unit 75/75/75%, 2 - 4 units 70/70/70%; limited cash-out refinance – 1 – 4 units 70/70/70% LTV/CLTV/HCLTV

            -  720 minimum credit score

            -   Cash-out refinance transactions are not permitted.

https://www.efanniemae.com/sf/refmaterials/eligibility/pdf/eligibilitymatrix.pdf

These are the same requiremnts that were stated in Announcement 09-02.

It must be something else.

Richard Ireland:

financed 100% by my local bank by taking seconds on all my other properties and a first on this one.

Rick,

Apparently the $205,000 you want to pay-off is comprised of a first lien on the subject property and second liens on other properties. For this to be a "Limited Cash Out Refinance" (a rate/term refinance) the loan amount will be limited to the amount of the first lien used to purchase the property. Any money above that to finance improvements made subsequent to purchase and to pay off second lien loans on properties other than the subject, even if the proceeds of those second lien loans were used to purchase the subject property, will be considered a "Cash Out Refinance." This is true even if you don't receive any cash due to the 2nd liens on the other properties are being paid off at closing.

It is possible in certain instances to have up to 10 financed properties and sell the loan to Fannie Mae. Regardless many investors have overlays to the Fannie guidelines that limit the number of financed properties on investment property loans to 4.

Even more importantly in your case, Fannie Mae does not allow for more than 4 financed investment properties when the loan is a "Cash Out Refinance" on an investment property. Borrowing $205,000 in your case appears to be a Cash Out Refinance on a 2-unit property since the $205,000 includes paying off liens on properties other than the subject.  If this were a Limited Cash Out Refinance on a 2-unit property so that only the 1st lien used to purchase the property was being refinanced and the LTV was 70% or less then the 10 unit rule would also apply. All of this presumes that the lender/investor does not have an overlay to Fannie guidelines prohibiting more than 4 financed properties. As I mentioned above this is a common overlay.

Note where you posted the footnote to the Eligibility Matrix where it says:

"Borrowers who own five to ten financed properties are subject to the following additional eligibility requirements:"

   " -   Investment property: "

               " -  720 minimum credit score"

               " -   Cash-out refinance transactions are not permitted."

BTW, thanks for pointing out the drive-by poster. That bozo went on several scenarios and spammed his contact info.

Good luck,

Harlan

Harlan,

Thanks for your thoughtful and thorough response.  This is what I was hoping for when I submitted this post.

I spoke with the banker today and we decided that we need to find out for sure if there is a problem, so we are going to prepare the package and send it through underwriting to Fannie Mae.  There are now 4 problems, so far, that have to be answered: 

1. How will the LTV calculation will be done?

2. Is this a prohibited cash-out transaction?  

3. Are funds in an “underwater” Roth IRA (where after-tax contributions exceed the value of the account, so can withdraw w/o penalty) sufficiently liquid for the 6 months of required reserves?

4. One of the properties was purchased in Nov. 2009, but not rented until May 2010 after rehab was done, and so rent not on a tax return (yet).  Is Fannie Mae really going to ignore the rental income because not on a return?

Wish me luck.  I will post the results.

Thanks to all,

Rick

Rick,

You're welcome.

Regarding #2 above, if you are trying to borrow more than what is necessary to pay off the first lien on the subject property this is, as you put it, "a prohibited cash out transaction." Questions 1, 3, & 4 are moot in that case.

If indeed you are doing a rate/term refi (a "Limited Cash Out Refinance" LCOR) by just paying off the first lien used to purchase the property then the answers to the other questions are:

1. Current appraised value.

3. Funds in a retirement account can be used if they are liquid, but the underwriter will only count 60% to 70% of the vested balance. (Yes you could try to make the argument that they are after tax amounts, but they probably won't go for it.)

4. If you have a history of renting properties, which apparently you do, rental income from the subject property should be counted based on the lease agreement with the explanation that the property was purchased in November '09 and not rented until after rehabilitation in 2010. This explains why the income is not listed on the 2009 return and a 2010 return is not due until 4/15/2011. As a side note: after 4/15/2011 a 2010 tax return would be due and an 8 month average of net rent would be used as income adding back the rehab expenses to the net rent since they could be considered a one-time expense.

Good luck. Let us know how it works out.

Harlan

Harlan,

You’re a quick study.  You read through this a get it right away.  (Yes, $205,000 is the first lien for purchase only.  Other liens are just extra collateral for the one loan.  Repairs funds came from cash flow.)  I agree with all your thoughts on the situation.

I have signed the app and we’ll see what happens.   I’ll let you know.

By the way, I had waited the six months since June 24^th because everyone told me I had to.  I was in agony watching the rates rise in December.  But, looking at the FAQ again, it seems to say that a pure rate and term could be done at any time after the purchase based on a new appraisal.   I’m curious because I can refi future loans faster if that’s the case.   Do you read it that way, too?  Or is seasoning something different and just not addressed in the FAQ?

Thanks,

Rick

You can use the appraised value after purchase however the appraisal will need to be supported by clear documentation of the improvements you have made and clearly documented by the appraiser. In addition, because the home is a two unit there is some tendency to find less available comps unless this is a very common property type in the area. If an appraiser is unable to support the increased value by nearby and very recent sales of other two units you could run into trouble. In addition, as has already been pointed out most lenders still cap the max number of financed properties at 4 although Fannie allows more. I would advise caution in planning this strategy for future purchases as Fannie's guidelines and lender overlays change frequently and what is available today may not be available tomorrow.

I am interested to see how your loan goes. I say this because appraiser's are often hesitant to assign a considerably higher value to a home so shortly after it's purchase and lenders are even more cautious about accepting them regardless of what work has been done. I wish you luck, I just know that in today's environment the tendency is to avoid risk, and while your research appears to be solid and your loan may "fit" you may find an underwriter who is looking for reasons to decline your loan as opposed to working with you to get the deal completed.

I hate too sound less than optimistic but unfortunately the underwriting process in today's market is a what I like to call a big game of CYA.

Good Luck,

Jason

Rick

would like to thank and commend you for doing so much research upfront, you got your ducks in order before hand and this will be a great help to you. As you have already seen FNMA has their guides, and different lenders have their own additional requirments. Some will tell you your can do a LCOR refi the day after your purchase, then next will tell you 12 months when using the appraised value. Do your research and shop around.

On the refi, you would be limited to refinancing the 1st mortgage balance on the subject property, having over 4 mortgaged properties subjects you to even more scrutiny

on your Roth IRA, get ahead of the game and contact the management company that handles your IRA and get clear documentation under what terms you can withdraw funds from your IRA and how much you can withdraw

just based on my experience

kc

Special thanks to Harlan, Jason and Ken --

I closed my loan today.  I'm happy now.  I didn't post anything during the process to avoid jinxing.  Here is the update:

I was working with a new local banker because her bank sells directly to FNMA which I needed because so many lenders have overlays that will not do a fifth loan even though they can resell it to Fannie Mae.  I had tried my regular bank LO, B of A, Chase, Amerisave, Quicken and others I can't remember now.

The problems I anticipated were not the one I finally encountered.  It came down to DTI, sort of.  One of my other properties was purchased Nov 19, 2009, so it appeared on my 2009 Schedule E.  It came with one tenant paying a low $1000 per month on one side, so I received $1,333.00 for 2009, but incurred expenses over $13,000 for roof repairs, etc. also in 2009.  The property is fully repaired and rented now and generates rent of $3,150 over a note including escrows of $1,989, so I am netting $1,160 per month.

The loan officer insisted on ignoring the present situation and instead computed that I was losing over $3,500 per month on this property, which sent my DTI near triple digits.  When I tried to protest that using partial 2009 data to predict ability to pay in 2011 was flawed from the start, and was a pure disaster when you assume I will replace my roof every year and then divide the partial 2009 rent by 12 to compute a monthly rental just over $100, her only response was "We use whatever you put on your tax return."

I did a first draft of the tax return for 2010 and showed that to her.  Now, though, while that property looked much better, the subject property now appears on Schedule E since I bought it in 2010.  Same problem with partial data.  She wants to divide the income for the six months that I owned it by 12 to compute monthly income, again failing the DTI test.

While I was still trying to convince my banker that her analysis was idiotic, moronic, ...  I tried to research within the FNMA rules about how to deal with a partial year on Schedule E.  There is nothing about it.  I tried to argue that since the rules require 2 years of Schedule E to be submitted for the property, but there is no reference to using any data from the early year, then they must be using that to assure that the second year is not a partial year.  Since my property was on only one Schedule E, then I could use the leases.  She didn't buy that.  I also showed her that Freddic Mac's rule says [paraphrasing] to use leases unless "the property has been owned more than a year and appears on Schedule E " which also avoids the partial year problem, but again without success.  She tried to deflect blame onto their underwriter, saying he would be responsible if FNMA required the loan be taken back, so he was tough.  I insisted that he can be as tough as he wants, but he still has to be at least average smart.  No sane person could look at that property and think it was costing me $3,500 per month to own, but that is where his rules led him.

So, I gave up on her and learned that CitiMortgage does 5th loans.  They were actually fantastic, but I have no idea how they handled the data.  I was asked for current information in my initial telephone conversation with them, and was conditionally approved on the spot.  I sent in the tax returns, leases, etc. and sat back to wait for the inevitable explosion.  But, I never had to explain anything about the partial year data even though Schedule E does not even list the acquisition date.  Maybe they didn't use Schedule E information for that property since it didn't appear twice.  I don't know.  After a few days, I got income and credit approval.  They never told me my DTI and I never asked.  It's like after they send you the letter that you passed the Bar Exam, you can call and ask about your individual sub-scores, but everyone is afraid to wake that sleeping dog!

I have become a member of MND and enjoy watching your conversations.  The one small drawback of working with CitiMortgage is that they naturally can't help you to decide when to lock or whether to pay points, etc.  I enjoyed having the benefits of your thoughts on that.  Here is my message to you as fight to improve the mortgage lending market:  [Rant alert]  Keep common sense in the process wherever you can.  Do not allow it to become too based on rules and regulations, because they will not lead to correct results.  Get quality people and use their talents.  Lending is a big picture process.  Know your client, not your rules. 

And fight back some when people complain about subprime.  Sure there have been people who got those loans and defaulted.  But, there are also many people who got those loans and paid them and went on to success.  Our first loan in 1998 was an 80-20.  We made no downpayment, and we probably never would have been able to save for one paying rent.  Because we were able to get started, now we have five beautiful bouncing loans and love every one of them.

Anyway, thanks again to all who offered advice, and keep up the good work and this site.

Rick

Thanks for your detailed account on your getting your ref-2 unit rental property loan. Some thoughts.. and they wont seem to be " fair" .  The pressure that underwriters are under is immense - the last year .. and everybody is in the eyes of regulators.. and yes the "Feds" . Non of the Underwriters wish to get too many investor rental mortgages accross their desks..  cause of the statistics - risk of foreclosure...  even with good credit..  and then they take into account the State, Locations... 

not trying to be pessimistic...  yes excellent credit, and good LTV still count....but these are realities.  " The number one goal I have as I start my first year as your DA- is to go after crooked mortgage business's " said the new DA for the whole state of California.

So - your landing at Citi- you may have caught an underwriter at a good time.  Your detailed presentation of your file , your "case" - financial position helped you.. so for that I say "Kudo's!" .