Refinancing Non-Arms-Length Non-Seasoned Home Purchase

by 'Getting Worried'

Ask Kate about refinancing a non-arms-length non-seasoned home purchase transaction: Hi Kate, Is 6 to 8 months seasoning long enough to wait for refinancing into a lower mortgage rate and conforming loan amount following a non-arms-length purchase transaction? I am the non-occupant co-borrower as well as joint owner with my address in a different state.



Getting Worried continues... But the occupant owner and borrower is self-employed with relatively good income, very good credit and a low 50% loan-to-value.

Many thanks. From Getting Worried.

Kate Answers: Refinancing Non-Arms-Length Non-Seasoned Home Purchase Transaction

Ask Kate at Get-Your-Best-Mortgage-Rate.com
Dear Getting Worried,

I'm not sure why the home purchase was originally considered a non-arms-length transaction. Depending on the reason, it could affect the possibility of a refinance.

Non-arms-length transactions are clearly explained at Non-Arms-Length Transaction Home Buying Help where you will meet Levi who wants to purchase his father's house for under-the- market-value and then immediately refinance with cash-out to pay back his dad.

Refinancing a Non-Seasoned Mortgage

First, I am going to focus my attention on the seasoning aspect.

A mortgage without 6 to 12 scheduled payments having been made is generally considered non-seasoned. The amount of time varies among loan programs, though.

Removing a co-borrower from a non-seasoned home loan complicates the refinance process further - even more so if the mortgage was originally a non-arms-length transaction!

So it's important to go into the loan process with legible and complete documentation showing that the occupant borrower has been living in the house and has the ability to qualify for the entire house payment. If the occupant borrower has been responsible for the monthly house payment, include cancelled checks (copies of both sides) or official bank statements to verify.

Use my Mortgage Information Planner to simplify your job.

Refinancing a Non-Arms-Length Mortgage

Now let's add in a non-arms-length scenario.

Say you originally bought the home at a below-market price from a relative. Most likely, the lender will calculate the terms of your loan based on the original (lower) purchase price instead of current (higher) appraised value. In addition, if you are thinking of cashing out your portion of the investment, don't be surprised if the lender says to wait until 12 regular payments have been made.

Non-arms-length transactions typically make underwriters suspicious. Being an open-book gives them a comfort level to approve a mortgage. So, I'll say it again. Be complete with your documentation and letters of explanation regarding the original transaction and the intention of the refinance.

I also suggest getting the process started with the most experienced mortgage originator you can find. You can find my 6 steps to comparing mortgage lenders and interest rates online here.

Best wishes for your refinance,

Ask Kate

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Following up from refinancing etc
by: getting worried

Late last year (2012) we got a 3.6%, 30 year conforming loan after 10 months of 'seasoning' with a rather predatory scheme charging 6% plus investment bank style fees.

The decision on selling the property and on the price was not made by a family member. Instead, it was made by the bank holding the underwater note on the property.

Things are looking ok but this has been a terrifying experience.

Hi 'Getting Worried', Kate here.

Terrifying is never good when coupled with mortgage financing. Sounds like an experience you'd never want to duplicate.

Thank you for the follow-up, Kate

Non Arm Lengths Purchase
by: Mary Anne from Coronado, CA

Hi Kate, I was reading your blog and I have a situation wherein my spouse's IRA purchased a property from Auction and now wants to sell it to my daughter...it is owned by the IRA account..and she wants to get her first home FHA...is this ARMS LENGTH?

Hi Mary Anne, Kate here...

By definition, if a Dad is selling a house to a daughter, the transaction is non-arm's length.

But technically speaking, an entity such as a limited liability company (LLC) can purchase real estate instead of an individual. But for finance purposes, the majority of residential lenders will require a human to be responsible for the mortgage.

In your daughter's case, which will a lender regard as the actual seller? Dad or entity? It's a toss up. But I'd be prepared for a non-arm's length transaction.

Best wishes, Kate

PS Get more information about buying a house from family at Non-Arms Length Transaction Home Loan Help where you'll meet Levi from New York.

PPS I'm back to leave an additional comment. If you meant that your spouse purchased the house using IRA funds, he is most likely the owner on record. (But perhaps you used a method I am not familiar with to buy the house via an IRA.)

Either way, it would be prudent to know the actual owner of the house according to county records. You can find your answer by reviewing the final title commitment, assuming title insurance was purchased during the transaction.

Update on the refinance
by: "Getting Worried"

Hi Kate

Please note we got the refinance on the non arms length and non seasoned loan, 30 year loan at reasonably competitive rate eg below 4% - just took patience and as you suggested total disclosure.

Many thanks from no longer so worried....

Hi, Kate here.

I'm so happy to hear back and know of your success! Thanks for taking the time to comment.

Best wishes, Kate

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You can also ask Kate about your mortgage at How to Find Your Mortgage Lender.

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