If we purchase our new home with cash, how soon can we get a mortgage and get some of it back?

Question of the week: If we purchase our new home with cash, how soon can we get a mortgage and get some of it back?

Answer:  You can start the process as soon as you close.

Since early in the pandemic homebuyers have been challenged to get offers accepted due to the surge in home seekers due to historically low interest rates. I have no actual data on this, however there has probably been a higher percentage of all cash sales in the previous 14-months than any 14-month period since FHA loans were created enabling long term mortgages with low down payments.

As a result, many buyers have leveraged themselves to produce cash for their purchases. Borrowing funds from 401(k) accounts, taking out equity lines on their current homes or properties, parents taking out funds using equity lines or from their savings and providing for the purchase. Whatever the means, a not insignificant number of new homeowners own their homes free and clear and would like much of the cash they put into their homes returned to them.

When obtaining cash from your home after purchasing, the transaction is a “cashout refinance.” If you are refinancing an existing mortgage and not obtaining any cash from the transaction, nor paying off a mortgage or lien taken out after the purchase, it is a “rate and term refinance.”

This distinction is important as there are different guidelines for cashout refinances than rate and term refinances. Most importantly are the loan-to-value limits; as well for most cashout transactions the rates and costs can be higher.

Because you are pulling cash out of your home, even if it was just put in a day, a week, a month, before your purchase, the loan is considered a cashout refinance.

There are several factors that go into structuring a post-purchase refinance, among them are:

Loan Limits There are three loan limits that we consider

  • Conforming (Fannie/Freddie) $548,250
    • High-balance conforming $822,375
    • Jumbo generally above $822,375

These are important as they determine many of the following guidelines and pricing. As loan amounts go higher, rates go higher, loan-to-value limits may go lower, and underwriting guidelines may get stricter.

Loan-To-Value (LTV) Loan-to-value is the percentage of the property value being covered by the mortgage. If the value is $700,000 then 80% is $560,000, if the LTV is 75% the loan amount would be $525,000.

For conforming, and high-balance, cashout refinances the maximum LTV is 80% of the value (see below). For jumbo loans, the maximum LTV depends on the lender. Some lenders will fund cashout refinances to 75% LTV, others cap their LTVs at 60%.

From the LTV example above, for a property valued at $700,000, an 80% LTV loan is a high-balance conforming mortgage, at 75% LTV the loan becomes a conforming mortgage.

Determining Value The general rule of thumb for the value used for underwriting for a property that sold within the past 12-months is the lesser of the appraised value or purchase price; keep reading for exceptions.

If you purchased your home for $700,000 in April, are applying for a refinance in July and the appraisal comes in at $690,000, the LTV of the mortgage will be based on the $690,000 value in the appraisal report. If the appraisal has a value of $725,000, the LTV will be based on your purchase price of $700,000 (keep reading).

The primary exception to this guideline is if you can show you have made significant improvements or upgrades to the property. For instance, we are in process on a post-purchase cashout refinance where the purchase closed in April. The value on the appraisal report is $15,000 over the purchase price because the buyer/borrower added air conditioning and showed the costs of the units. The appraiser then used comparable sales that had air condition to reach the value.

Because of the upgrade and availability of other sales with similar size, bed/bath count, and air conditioning, the appraiser can show the home is worth more than it was purchased for three months ago and our lender should accept this higher value.

Another factor that can result in a higher appraised value being used for loan-to-value calculations is if the purchase has due to distress, for example in a divorce where lower price to ensure a quick sale, or to bail out a seller from foreclosure or default. These circumstances are a bit more difficult to get an exception to the lesser of purchase price or appraised value, but if well documented the exception may be granted.

Rate/cost For the same LTV, at the same cost in points (upfront cost of the loan), rates for cashout refinances are higher for a jumbo loan than a high-balance conforming loan which is higher than a conforming loan.

Because of this, when looking at a cashout refinance we take into consideration the loan-to-value and loan type and the lower rate that may be available if we are able to use a conforming loan instead of a high-balance loan, or high-balance instead of jumbo. Depending on the spread in the dollar amount to the next level down of loan limits, and the LTV, different strategies may apply.

Take our example above where for a property valued at $700,000.

At 80% LTV the loan amount is $560,000, is a high-balance mortgage and the rate may be 3.5%, and the payment is $2515 per month.

However, by taking $11,750 less from the property the loan amount becomes a conforming loan of $548,250 with a rate, at the same cost in points, of 3.00% and a monthly payment of $2310 per month. Do you need the additional $11,750 for $205 per month?

The spread between the high-balance and jumbo loans can be even greater, in which case we often council clients to fund the maximum high-balance loan of $822,375 and after closing the refinance obtain a HELOC for the ability to access additional funds if needed.

Documenting Funds Long time readers of the WR&MU know that documenting deposits into bank accounts is a primary sticking point in loan approvals. Large deposits into bank accounts that are not sourced from an employer or another bank account you have that we have verified as your own and without large deposits in the past few months, require documentation as to source and that the funds are not the result of any new credit and therefore payments.

Consider your free and clear home you purchased a few months ago with all cash and no loan to be similar to a new bank account opened with a very large cash deposit. Where did the money come from for the purchase?

As part of the post-close refinance, we will need to source and document the funds used for purchasing your home. If some, or all, of the funds were borrowed from another source, that is fine, however we will need to document the terms of the loan, how much will be paid back as part of our refinance transaction, will there still be a balance and payment we need to consider for our transaction?

Note that the guidelines above are for owner-occupied single-family residences, other restrictions and guidelines are in place for investment and multi-family properties, and other loan types such as FHA and VA.

If you have purchased a home in the recent past with cash, or a significant amount of cash down payment, and would like to look at options for pull some of that cash back out please contact me to assist you.

If you are considering purchasing a home and accumulating funds from different sources for the purchase with the intention of a post-close refinance after closing, please contact me so I can help you structure the cash transactions so that the post-close refinance goes smoother.

Have a question? Ask me!

What the heck? Over the past week U.S. Treasury yields have fallen somewhat significantly, putting downward pressure on mortgage rates. Why? Reading ten different analysts provides ten different responses. All signs point, as usual when it comes to rates, to the Federal Reserve. Minutes released from the June meeting indicated some officials, no numbers given just vague references to “various,” or “several,” slowing the purchase of U.S. Treasuries and mortgages, slowing the purchase of mortgages sooner than later due to higher home prices, keeping the course on rates and purchases until “significant progress” is made in employment and inflation. It appears there is no consensus one way or the other, but those experienced at reading Fed minutes, akin to reading tea leaves, feel that some of the more powerful members are for the status quo and therefore not much change. The minutes did appear to open up more conversation, and perhaps action, at their July meeting.

What the heck? Long time readers of the WR&MU know that I have felt rates should have risen some time ago and today should be at least one-half of one percent higher than they are. Talking to others and reading from several different sources, I am not the only who feels this way. Seeing another dip in rates this week has me scratching my head and wondering what I am missing and why investors are buying into such low rates for long-term investments.

Rates for Friday July 16, 2021: After climbing all week (lower rates), the Mortgage Backed Securities market reversed today with a decent drop in prices (higher rates). This either indicates that the MBS price climb was technical in nature, or that after completely digesting the Fed minutes overnight and looking ahead to possible (likely?) changes by the Fed in the near future, investors are anticipating higher rates. Rates this week dip from last Friday.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.625% Down 0.125%

30 year high-balance conforming                   2.75%   Down 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Many of you know that I have been a member of the Rotary Club of Long Beach for many years. Rotary is an international organization with clubs around the world who are helping build better communities in their hometowns and across the globe. Rotary is not just for “older people,” but also for students and young adults.

Our Long Beach club has recently re-started two “Rotaract” clubs, so labelled as they are for younger generations and are meant to be an entry into Rotary and stepping stones for their members to become Rotarians when the timing is right for them.

Our community Rotaract club is for young adults, generally between 21-35 years of age, who are looking to create new relationships and work with others on projects that benefit our community, network professionally and receive support and opportunities from Rotarians. If you are, or know someone, who may be interested in learning more about our community Rotaract club please contact me.

After being off campus for many years, several students at Cal State Long Beach, with assistance from members of Long Beach Rotary, have certified a new Rotaract club on the campus. This is an opportunity for CSULB students to become part of Rotary International and come together with a common purpose of expanding their network of friends and connections all with a common goal of community centered projects on their campus and region. If you have a son, daughter, niece, nephew, grandchildren, neighbors who are enrolled at CSULB and are looking for a meaningful extra-curricular activity, have them contact me and I can put them in touch with the leadership of the CSULB Rotaract.

From paying for water wells in Mozambique, to providing polio vaccinations in Mexico, to reading to elementary students in Long Beach schools, to purchasing hundreds of thousands of books for Long Beach schools and pre-K programs, to running a camp for high school students teaching business principles and practices, to installing a program in local middle schools that teach ethics to students, our Rotary club is engaged and active. All while members have a good time working together. Young adults can become of this worldwide network of men and women who like to say, “we have fun with a purpose.” 

Please contact me for more information on our Rotaract clubs for young adults, or if you are interested in a Rotary club in Long Beach, or where every you may live or work, I am happy to make and introduction for you.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog