Lender says my own labor doesn't count toward the refi

Question

I do the work myself, mostly, which is why the numbers on these looked good to me in the first place. Framing, tile, trim, drywall if I have to. I sub out the panel and the HVAC.

On a house where a general would quote 55k for the scope, my materials plus subs come to maybe 28k. So on paper I'm 27k cheaper into the same finished house. The loan officer I've been talking to told me flatly that self-performed labor isn't counted, and asked for paid invoices and lien waivers for the rehab. My labor produces neither.

What I don't understand is whether that actually costs me anything at the refinance. If the permanent loan is sized off the finished appraisal, the appraiser doesn't know or care who swung the hammer, and a 240k house is a 240k house. So the 27k should show up as equity and I recover the same dollars as the guy who paid the general, just with less cash in.

But he kept coming back to documented cost, which makes me think there's a product where the loan is capped at what I can prove I spent. If that's the one I end up in, my discipline about doing the work myself is actively working against me, because my provable number is 28k instead of 55k.

Which version applies, and is there a legitimate way for a person with a trades entity to bill the rehab so the labor is documented at all? I'd rather ask than assume.

Rena Expert · Accepted Answer

Two mechanisms, and which one you're offered decides whether your labor is worth anything at the closing table.

A standard cash-out refinance after the property has been held for the lender's seasoning period is sized off a new appraised value. The appraiser values finished condition. Your 27k of saved labor shows up as equity, and the loan doesn't care who did the work. What you recover in cash is a function of the appraisal and the coverage ratio, and because your cash in is lower, a full recovery is easier for you than for someone who paid a general.

The other mechanism reimburses documented cost. Lenders use it to let you refinance before the seasoning period runs, and the loan is capped by what you can prove you paid, which is your 28k. Self-performed labor has no invoice, so it doesn't enter the cap. Both products exist at most lenders and the names differ, so ask which one the quote is for and get the seasoning period and the valuation basis in the same written term sheet.

On billing your own trades entity into your own project: some lenders permit an arm's length contract with a separate licensed entity and many prohibit affiliated contractors outright, and how it's treated for tax purposes is a question for your CPA. Whether a related-party invoice is acceptable is the lender's call, in writing, before you start the work.

The constraint you haven't mentioned is coverage. Self-performing lowers your cash in, and it does nothing to the rent. If the appraisal supports 180k at 75 percent but the rent only supports 155k at the lender's ratio, you're capped at 155k and your labor savings are the only reason you still get your money out. Solve the rent first.

carlos_nunez · Answer

I'm in the invoice trail fight right now on a house where I self-performed the demo and the flooring. My lender wanted a paid invoice per line item on the scope and got twitchy when three of the lines had material receipts and nothing else. We got through it, but they made me sign a statement that no undocumented labor cost was being claimed for reimbursement.

So yes, there are two different loans in your question and your loan officer is describing the reimbursement one.

gregpowell66 · Answer

The other thing your invoices do is set your depreciation basis, and doing everything yourself gives you a smaller one, which is a CPA conversation.

On the appraisal side, from the construction end, be aware that a lot of what you're good at reads as maintenance to an appraiser. Perfect trim and level tile get you a condition rating, not a line item. If you want the 240k number, the money goes into things they measure. Added bathroom, finished square footage, kitchen at neighborhood standard. I've watched people self-perform 400 hours of very good work into a house that appraised the same as the cosmetic flip down the street.

Lender says my own labor doesn't count toward the refi

3 replies