This loan type is called a “cash out refinance”, even though you are not paying off a mortgage. If you take a new mortgage out on a home you already own, regardless of whether a lien exists, it is still considered a refinance. 

As always if you buy your home for all cash within twelve months, the lender will base the loan to value ratio on the purchase price, regardless of current value. If you got a very good deal on the home and can produce a new appraisal that is much higher, the lenders will not allow the mortgage to be based on that higher appraisal until you have owned the home for over twelve months. This is called “ownership seasoning”.

That’s fine, we get that, they want to make sure of the true market value of the home before they lend more- just in case there might have been shenanigans involved.

But, the rules just got a little tougher! Now they want to know where you got the money from, do you have to pay it back and a bunch of other details that we have listed below-

If you do not meet the criteria listed below, the lender will require you to wait 6 months from the date of purchase to even apply for the mortgage.

Rules, Rules:

1.       The new loan amount must not be more than the actual documented amount of the borrower’s initial investment in purchasing the property plus the financing of closing costs- this means they want to know where the money came from it must be the borrowers’ own money  and they won’t give you more than you put in.

2.       The purchase transaction was an arms‐length transaction- you cannot have purchased the home from family or anybody you might know. Shenanigans!

3.       If seller of property was a Corporation, the lender wants to see who owns the corporation- “more shenanigans”

4.       The purchase transaction is documented by the closing statement which confirms that no mortgage financing was used to obtain the subject property. There must be proof that all cash was paid for the home, so have copies of checks and source of funds available.

5.       The preliminary title search or report must not reflect any existing liens on the subject property. There can be no liens on the property, even if there is a gift involved.

6.       If the source of funds to acquire the subject property was a loan secured by another property, the new closing statement must reflect that source. Again, where did you get the money from? Did you take a loan out on one house to buy another?

In addition, the borrower’s credit score must be a minimum of 720, the home must be primary or second home and the loan to value will be reduced from what is normally allowed. Finally, there must be a solid explanation as to why you paid all cash in the first place and why you need the money back now!

The issue recently came up for me when working with a new client. The response I heard back from most of my lenders was, “just wait the six months”. However, if you can’t take no for an answer, there are lenders that will do the loan within the 6 month period without any pricing penalties. You just need to shop around and lay the cards out upfront.