Trouble in Highland Village Flower Mound With Mortgage Home Improvement Mishap
A close friend in Highland Village was building onto his current home and using a true home improvement loan. His intentions after building on to his property was to refinance his current loan, which was used to buy the home, and the new home improvement loan, all into one new loan. His home improvement loan lender advised him that he could do this, because he could essentially have a 95% loan to value. (My point here) Well, when using a purchase loan or a rate and term refinance loan where you are are paying off only a loan or liens that were used to buy the home, YES, you can go up to a 95% loan to value. On the other hand, when you are paying off a true home improvement loan, the guidelines will only let you go up to 85% loan to value…this is called a “Fannie Mae cash-out” rule, because the 2nd lien is a true home improvement loan. Long story short, now that the add on is done, my friend reconnects with this bank to get the refinance, and they now are realizing that they can not go above 85% and are acting like this is not their problem. The truth of the matter is, if they would have done their research before putting a plan of action together for their client/my friend, they wouldn’t be in this situation.
The rules of a Fannie Mae cash-out refinance, where you are paying off a true home improvement loan, you can not take the loan to value or combined loan to value over 85%. This is different than a Texas a(6) cash-out, where money was actually used for debt consolidation and/or the cash was given to the borrower to do with as he pleased. In the home improvement loan, money is distributed directly to the companies that are improving the house, so the cash did not go through the hands of the borrower…Texas a(6) cash-out rules only allow 80% LTV.
Here is where the problem lies in this story. Typcially, when you build onto your property and use a loan to do it, you might use a temporary loan that allows you to take out draws of money at different times during the process to pay the contractor in different stages of the build. Once the build job is complete, those lenders like you to pay that loan off with a permanant loan. That being said, my friend is going to have a hard time finding a mortgage that will now let him pay off this temporary loan, and the temporary lien holder wants it paid off.