I think there are some mortgage folks on here. My wife and I are beginning to house hunt. We have the typical options of buy existing, building, or buy a fixer upper, gut and remodel. The question is, how would we finance a fixer upper and renovation at the same time? Assuming good credit and a 20% down payment to avoid PMI, what type of loan do we need?
I've only seen a 203(k), and a Fannie May HomeStyle something. Are there other options?
Thanks!
There used to be the Homepath Renovation financing but from what I understand those are gone. When I looked into the the Homestyle renovation loan was the way to go but in the end we decided to go with a conventional loan (aimloan.com) and fund the renovation with savings.
I knew people who did it during the housing boom by getting a primary mortgage, getting re-assessed six months later and pulling a second and using that for upgrades. This clearly doesn't work any more. I think the fundamental problem is $40k in upgrades seldom (if ever in a normal market) makes a house $40k more valuable. Because of that math it doesn't make sense to loan money for upgrades.
We looked at that in 2012 when we were house shopping. You might be able to get a construction loan for a house that needs remodeling, but that's not that easy to get (or wasn't back then). Depending on the location of the house, there might also be something available from HUD (actually I think that's the 203k you mentioned above).
When I talked to our credit union about that they were happy to finance a fixer upper if I could prove that I had the additional $50k-$60k in the bank to pay for the interior build out that they were in turn lending me. No, I'm not making that up.
Building and remodeling loans don't make a lot of sense to a bank.
House builds are like car builds and not worth much until they are complete
Remodeling is money down the drain as far as the bank is concerned. You will have to secure the loan somehow. Can you do it on your line of credit?
If the house really NEEDS a complete remodel then you should be able to buy the house for a representative lowball price, do the remodel and then refinance to the new appraised value.
We just did this with a Fannie May HomeStyle loan. It is not a super simple process and not all banks offer the HomeStyle loans. PRIOR to closing, you have to get quotes on all work to be done and firm commitments to have the work done within 1 year of closing. The house should also be able to be moved into within 90 days according to my loan officer but my loan documents had nothing about that in them so your results may vary. You have to use the contractor that did the quote(s) initially, and you have to figure out what needs done before getting it appraised which can be tough.
They then give your quote on all work to the appraiser who does what they call a "subject-to" appraisal which values the house as if all the work quoted is already done, and then after the work is done the appraiser comes back out and verifies it before any checks can be written to the contractors.
I am fortunate in that my family business is a licensed contractor so I wrote up the quote and hired the subs myself. (With approval of the bank!) Otherwise you pretty much have to use a general contractor and you need to let them know how the payment process works. If they itemize the quote they can get paid on each item as it's done, but there are no partial draws.
The only reason to use a HomeStyle loan is if the house would be considered "uninhabitable" without some work being done. I.e. holes in walls, leaking roof, any mold, non-functional hvac, etc. If those things are functional or could be made to work well enough to pass an inspection you would probably be better off with a standard mortgage plus a line of equity. You can typically get an equity line even if you only have 20% equity. The rates are very low and many banks will set them up for you with no fees for the first year or two. The disadvantage is they usually won't go over a certain loan to value total (say 90 or 95%) so you might have to jump through hoops there. But it's a lot simpler hoops than the HomeStyle loan.
Don't get me wrong, the HomeStyle loan was perfect for us and we ended up in amazing house we would have been unable to get a conforming mortgage on, but it was a ton of work. Talk to a good local mortgage person to find out if they offer it. We used Huntington bank (they're locally based) and the people I dealt with there were great.
I should add that in order to figure out what needed done, in addition to having years of experience remodeling properties myself, I hired a contractor to go through with me and give me opinions. That cost $350 and I'm not sure it was worth it - I didn't do a bunch of the things he spotted and it was okay. He quoted on the job and I had trouble getting one other contractor to quote. The way I finally got him to quote it was writing up exactly everything that needed done. Then I realized I could quote on that and hire any subs myself so that backfired on him. ;-)
My wife and I have figured that we're either going to live with the "old" parts of a house until we save up enough equity to get a HELOC (less and less common now), save up enough of a down payment that we have money left over, or use less of our downpayment on the downpayment and only put down 5% and pay the PMI.
Or ask Mommy and Daddy for a loan. I'm not above that--they're willing and I have perfect credit with them. Actually, they owe me money if you don't count all those years that they paid for everything
I think that financially the sweet spot is to buy a house that needs cosmetic help but not structural work. Buy as much house as you can comfortably afford in the best neighborhood and do the lipstick and blush work yourself paying for it as you go out of pocket.
Often, homesellers don't differentiate between an older home that needs paint and fixtures to make it look virtually new and the home that needs a new foundation and a 1,500 sq ft addition to be competitive in the new market.
One other datapoint, although likely not relevant for this situation - there are VA backed loans for disabled veterans that will accommodate a remodel(or even new construction) for a disabled vet with qualified special needs.
BoxheadTim wrote: When I talked to our credit union about that they were happy to finance a fixer upper if I could prove that I had the additional $50k-$60k in the bank to pay for the interior build out that they were in turn lending me. No, I'm not making that up.
1st rule of getting a loan - prove that you don't need it.
The best strategy is to never update a home at all until right before you sell it, because nobody wants "old" remodels. The problem is that you live in a crappy house for years and years. Ideally you change things in a way you can afford that makes you happy and in the end adds some value to the building.
I very slightly checked into the 203 loans and they appeared to be pretty much the same as dculbertson said. It wasn't something you could buy and live in while you renovate (unless maybe if you were actually a contractor).
Thanks for the info folks! I have a lot more research to do.
In reply to dculberson:
+1 to what he said.
I just bought a house with a homepath loan. It was going to type out basically what dculberson said. You have that option or the 203k.
We went through Inlanta Mortgage and were relatively satisfied for as much as a PITA all the required documentation is.
Our house was basically cosmetic but has some roof leaks, termite damage and no kitchen. The rest we are paying for out of pocket. (HVAC, appliances, paint, smaller amounts of flooring etc.)
A co-worker's son did something similar to this a couple of years ago. He bought a distressed house in need of a complete renovation. The rules are fairly specific and not really friendly if you were thinking of doing most of the work yourself. Roughly put, he got an additional line of credit based on how much the house would be worth when completed. Just about all of the work had to be done by licensed contractors.
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