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We're very fortunate to have a generous uncle who loaned us interest-free money to purchase a house with cash. It seems like cash is the only way to purchase a house nowadays. Now we need to refinance the house to pay him back. We bought the house for 400K. But after some major repairs, the house is worth at least $500K. How much can I refinance? I call some loan offices but they gave different answers. One said 80% of the original purchase price ($320K). The other said 60% of currently appraised value of the house ($300K). One said I can't refinance at all 1 year after purchase date. If you have any experience on this, please help. Thanks in advance.

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Heloc ftw.

[eta] how's your DTI?

I've dealt with the same problem before on investment properties. If you want a standard mortgage at the best interest rates, you will have to wait a full year to be able to pull out around 80% of the appraised value, or after 3-6 months(depending on the seasoning requirements of the lender) you can pull out 50-60% of what it appraises for, or 80% of purchase price(what you've already been told).
What is your uncle going to do with the cash once he gets it back? If he's just going to park it in a CD or something equally worthless, he might as well let you ride out the full year to cash out around 80% of appraised value.

Not that you asked, but it is not "legal" to loan someone money, interest free.

True, from the IRS perspective, there are minimum interest rates, but as long as it's under the gift limit per year, it just gets chalked up under that.

tennis8363 said:   Not that you asked, but it is not "legal" to loan someone money, interest free.

tennis8363 said:   Not that you asked, but it is not "legal" to loan someone money, interest free.

HUH?

One key thing to be aware of, you only have 90 days from the purchase date of the home to be able to refinance, pull cash out, and deduct the interest fully on your taxes.

Once you're past 90 days it's treated like you pulled money out of the home and unless you're using it to improve the home, you'll only be able to deduct interest on 100k of the loan.

tennis8363 said:   Not that you asked, but it is not "legal" to loan someone money, interest free.


Of course it's legal. IRC 7872. The IRS considers it as if it was a loan at the applicable federal interest rate, where the lender gifts the interest back to the borrower every year. The lender is supposed to declare the imputed interest as income, of course.

tennis8363 said:   Not that you asked, but it is not "legal" to loan someone money, interest free.You are correct in that no one asked you for incorrect information.

oopsz said:   tennis8363 said:   Not that you asked, but it is not "legal" to loan someone money, interest free.


Of course it's legal. IRC 7872. The IRS considers it as if it was a loan at the applicable federal interest rate, where the lender gifts the interest back to the borrower every year. The lender is supposed to declare the imputed interest as income, of course.


It sounds like you are both right. He just worded it poorly...yes?

Everyone is sorta correct. Within a year to 6 months depending on the bank, they go by the purchase price. After a year, they can go by the appraised value. Usually if your uncle didn't record a mortgage, they would consider this a cash out refi which typically limits you to 70% LTV. If he had just recorded a mortgage, then they could consider it a standard refi and they'd go to 80% LTV without any PMI. You'd have to check with a bank on that one. On the other hand if you spent 100k fixing it up and you can document it to the appraiser, you might get your 500k value and they could refi you now at 70% or 80% LTV at the new price.

I was able to do cashout refinance 75% of the appraised value within 3 months of purchasing an investment property. Surprisingly I was able to do this wiht Provident which is traditionally very picky. Originally the processor refused to proceed and asked me wait at least 6 months. I pointed out Fannie's delayed financing exception SEL-2011-05 that seasoning is not required if certain conditions are met. After some internal investigation he allowed me to proceed with the loan application which was funded without any issues.

Don't screw up with the money.

Near my neighborhood, it's 75%.

Thanks everyone, especially henry33 and sabhinav. FW ROCKS!



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