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Are purchase loans different than refinancing
Although all real estate loans are financed along the same guidelines there are some differences in purchase money loans and refinance loans. With a refinance loan you may take cash out, if you have the equity available, lenders won't allow cash out on a purchase. For
the most part a purchase loan and a refinance loan are very similar. The main
and most obvious differences are with a purchase generally you will have to
bring money to the closing table for down payment and/or closing costs whereas
with a refinance you will generally just roll your closing costs back into your
loan and you will have very little, if any, money due at closing from out of
your pocket. Another difference between a purchase loan and a refinancing loan
is that with a purchase the lender is going to use the lower of the sales price
or the appraised value as the value that they base your loan to value off of.
With a refinancing loan, the lender is simply going to go off of the appraised
value. However, if you are trying to refinance your home quickly after
purchasing the home, unless you have done and can document a lot of improvements
most lenders are going to use the purchase price as the value of the home. When a homeowner is looking to do a refinance transaction, the lender is required to make sure that the loan has a "net tangible benefit" to the borrower.
An example of a "net tangible benefit" would be when the borrower is taking cash-out to pay off high interest rate credit cards and lowering their monthly obligations. Many lenders will place purchase transaction loan files ahead of refinances in their underwriting departments. This is because purchases are often much more time sensitive and frequently must ahere to a specific closing date. In a refinance transaction, although the borrower often feels time constraints, closing the loan a few days late usually does not present any hardships. Refinancing today has become an incredibly fast and easy process compared to the first time you purchased a home. Many times a person can purchase a home with one loan program with the direct intent to refinance after a handful of months. Several factors can play into such a scenario, such as a flow of income to be provided after the purchase, or credit repairs, or the value of the home raising quickly, etc...However, most companies require that the initial mortgage be 'seasoned' for a set amount of months before a new refinance is allowed. In most cases, a refinance to replace the current mortgage with one with a shorter term or a lower interest rate has the same underwriting requirements as a purchase loan. For instance, refinancing a current 30 year mortgage with a 15 year mortgage is often treated the same a purchase money mortgage. On the other hand, a Cash-Out refinance in which the home owner withdraws from the equity built in the house has somewhat stricter qualification threshold. No new deed is required for a refinance unless one of the current owners is being taken off of the property. Many other costs associated with a purchase money transaction such as a home inspection and survey may not be required. A "contract" is involved in a purchase loan which is not involved in a refinance. Some lenders will offer enhancements to the interest rate for new home purchases and higher down payments.
Ironically some lenders will create a purchase as a refi, if you are in a lease option and have 12 months cancelled checks, you can potentially "refinance" the property based on appraised value and get a lower loan to value. One of the biggest differences is there maybe loan to value reduction if you are planning to take money out on a refinance. When you refinance their is a 3 day right of rescission period. Where as on a purchase, the transaction will fund that day.
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Information listed above is to be used for educational purposes only and is not guaranteed
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