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Flippers Beware!

Let’s say you buy a residential investment property for $150,000 using cash.  You fully expect to get a renter, but first need to make some improvements to the property.  So, being as smart as you are, you postpone financing the property because you should undoubtedly be able to get higher loan proceeds after you enhance value to $200,000 – right?caution Most lenders will not advance more than 75% of the original purchase price for the “Cash-Out Refinancing” of investment properties – until at least 12 months after the purchase.  This means that you cannot get a loan based on value during that time frame, unless you obtain the loan from a “portfolio” lender (a lender who can maintain the loan on their own books without either selling it to FNMA or having it guaranteed by FHA).  Nothing wrong with getting a portfolio loan, but they are oftentimes more expensive.

The government enforced this idea in order to prevent the flipping of homes.  Before the housing crisis, investors were bidding up the price of homes via quick cash closings, only to turn around and either quickly selling for a higher price or financing virtually 100% of the price right after closing (there were several lending programs that made it easy for them to do so).  Thus, the government wanted to prevent NON-owner occupant borrowers from continuing the same flipping practices – mainly in order to avoid purchasing or guaranteeing a loan secured by properties with inflated values.

Here’s the Point: Lenders take precautions to not lend against values that could be inflated. Within the first 12 months from a residential cash purchase, non-owner occupied investors/borrowers are generally restricted to a 75% LTV cash-out refi ratio based on the LOWER of original purchase price and value.