Financing Question

Financing, Hard Money Lenders, Private Money
1

I have a question I am hoping you can help me with. My wife and I fell in love with a house that needs a bunch of work. It is not an investor or hard money deal, as I may only have around 10% equity. I am trying to figure out a way to purchase the house and get money to complete the repairs with out paying too much for the house. According to my mortgage broker, conventional money will only allow for 6% seller cash back. This is not enough to do what it needs. So I had a thought, What if I had my friend negotiate a contract to get the best price. Then he assigns the contract to me at a higher price. (310,000 negotiated, 360,000 I finance) I finance it conventionally, he gives me the cash and I repair the house.My mortgage broker already had her appraiser look at the house (as is) and they would loan 389,000 on it. But, if my friend negotiated it, I could get it between 290,00 - 310,000 and then I could assume it for 360,000, then he gives me the cash. So, will this scenario work?

Here are the numbers:

purchase - 280,000 - 310,000

House 5bd, 3ba, 4038 sqft, built in 1977 and nothing has been touched since Gold, avocado…yuck!

Arv - 374,000 - 394,000 from comps - Zillo’s estimated value with sqft and # of bd, ba corrected plus changed for planned improvments - 440,000

Cost of repairs 50,000 - 70,000 for updating mostly, Plus fix some small credit issues

It would be our primary residence

FICO - 580 - 600, BK 4yrs ago

100 - 110k combined income

Little to no money down.

Hoping to use an interrest only loan for 2yrs and then refi to a traditional loan so the payments are not 2500 - 3000

I appreciate the input.
Thanks BW

2

If it needs a bunch of work conventional lenders will not finance the deal, they will require the work be done prior to funding. You will need to go with a hard money rehab loan on this one given the low fico.

3

The hypothetical between you and your friend is not advisable; you would be committing loan fraud and if your mortgage broker knew about it, he/she would be in bed with you.

Now onto what you could do…

As you intend to occupy this as your primary residence, you have a mid FICO is between 580-600, BK > 4 years ago and about 70K in repair costs, I suggest that you investigate the use of a FHA 203(k) loan (my only concern is that the property might exceed the FHA max. lending limits in your area).

If your broker is does not have a FHA license (most don’t), feel free to contact me.

Regards,

4

Thanks for the help. After thinking about it you are right. Fraud is definetly not the route I want to take.

I apprectite the input.

BW

5

If you go with that fha 203k loan it will be quite the wait.

6

I think I will try to talk the wife out of the house. It’s that or live in a very retro house for a year, when I can pull a heloc and fix some stuff. UGH

7

Work on pullin the credit up a bit and you’ll be eligible for a conventional rehab loan program that covers purchase+rehab. You don’t have far to go, 620+ will do it.

8

what state are you in i may be able to get you some help

9

We have been working on cleaning up the credit reports. I hope we will be up to 620 in the next few months.

I am in Colorado.

Thanks,
Bill

10

Huh? What experience do you have with FHA?

11

enough to know there a nightmare

12

I agree with Zach. 203K loans do not get done quickly.

13

Now that we have a consensus, have either one of you ever orginated an FHA loan before?

14

up2itnow,

What do you mean by a bunch of work? Will the appraisal stand on its own? A bunch of work doesn’t mean that you automatically need a REHAB loan. Upgrading a house is not the same as a needed REHAB/CONSTRUCTION loan.

Why not purchase the home at agreed purchase price - $280,000 - $310,000 and then do a no seasoning refi to the appraised value of $389,000 to take out the needed cash for repairs?

If the property is acceptable to an underwriter then you should be able to obtain 100% financing at your scores. I would check your current mortgage broker to see if he knows of a lender that will accept the appraisal before going into a REHAB loan.

If it does need necessary work, then you’ll have to define that work in a cost breakdown though a licensed general contractor in your area. This would be a start for you to define exactly how much money you will need.

203k or Conventional Construction would be your next step.

EZLoanz is right about the FHA licensing. If you’re not licensed to do FHA then you’re more than likely going to dismiss it rather quickly. However, it doesn’t necessarily mean that the 203k is anymore of a nightmare than a regular construction loan. The difference is minimal. Paperwork is paperwork and there will be enough of it on any construction loan.

Those of us that know how to close a construction loan are few as experience comes with age and construction loans take time to complete.

If you hear someone complaining about the paperwork within a construction loan, you’d better off stay away from that person.

Cost of repairs 50,000 - 70,000 for updating mostly, Plus fix some small credit issues

Do you have a cost breakdown? This is the question that was missed here. And how much do you need to do your credit repair? Credit repair companies cost less than $800.00

Another question that comes to mind is what type of property is this?

At the very least, let’s just assume as we are here that your project needs a considerable amount of work. With your scores, we could entertain a construction loan with a Loan to value of 65% and/or a loan to construction (ARV) of 75% whichever is less.

You don’t need your 10% down if the equity is in the project as you have stated. Equity = down payment. Your interest rate should be between 6.875 and 7.50% for a six month construction term.

I would advise staying away from trying to flip the property back and forth between you and your friend as this can lead to loan fraud.

Your Bk 4 years old is not an issue.

Hope this helps.

15

EZ,

I have originated plenty of FHA mortgages over the last couple of years. I am working on two right now as a matter of fact. Now that we have that answered…What does it have to do with the price of tea in china?

16

Also,anyone who says that 203K loans are the same as construction loans is not correct. Construction loans are a piece of cake. 1X or 2X closes. Here in Texas we can close those in 10 days. Here are the differences

Plan Review - Prior to the appraisal, a HUD-accepted plan reviewer (or fee consultant) must visit the site to ensure compliance with program requirements. The utilities must be on for this site review to take place.

To process a Section 203(k) mortgage, two appraisals can be performed: (1) As-is value of the property; and (2) Estimated market value of the property assuming completion of the rehabilitation.

Preliminary Feasibility Analysis. After the property is located, the homebuyer and their realtor should make a marketability analysis prior to signing the sales contract.

In addition to all the HUD forms that have to be filled out by the contractor completing the work on the property. To make sure that things like the following are done correctly.

Cost Effective Energy Conservation Standards
(1) Addition to Existing Structure. New construction must conform with local codes and HUD Minimum Property Standards in 24 CFR 200.926d.

(2) Rehabilitation of Existing Structure. To improve the thermal efficiency of the dwelling, the following are required:

a) Weatherstrip all doors and windows to reduce infiltration of air when existing weatherstripping is inadequate or nonexistent.

b) Caulk or seal all openings, cracks or joints in the building envelope to reduce air infiltration.

c) Insulate all openings in exterior walls where the cavity has been exposed as a result of the rehabilitation. Insulate ceiling areas where necessary

d) Adequately ventilate attic and crawl space areas. For additional information and requirements, refer to 24 CFR Part 39.

(3) Replacement Systems.

a) Heating, ventilating, and air conditioning system supply and return pipes and ducts must be insulated whenever they run through unconditioned spaces.

b) Heating systems, burners, and air conditioning systems must be carefully sized to be no greater than 15 percent oversized for the critical design, heating or cooling, except to satisfy the manufacturer’s next closest nominal size.

Most of this information can be found on the www.hud.gov web-site. Making sure that the property conforms to FHA standards can take awhile… So to make a long story short; things like this are most certainly NOT minimal and will take more time than a conventional loan. Finally I can’t find anywhere in this posting where anyone complained about paperwork. I think the only point that was stated is that these loans (203K) take longer than regular FHA and construction loans to close. Hope this helps.

17

I thought it was rather obvious; if you don’t experience in something, you shouldn’t offer advice on the same.

Regards,

18

Chris,

Not be a stickler, but you didn’t give the differences between a 203K loan and a conventional construction loan…you provided a cut and paste summary 203K loan from the HUD website.

The HUD information you provided pertains to energy efficiency requirements; I am not quite sure how this dispels the 203K loan as the loan of choice for owner occupied purchase and rehab or refinance and rehab projects.

FHA clearly offers the greatest overall value for the borrower and I fail to see how “time to close” overrides higher interest rates, higher down payment costs, higher credit score requirements, etc.

Your post claims that you can close a conventional construction loan in TX in 7 days, but you don’t say how long it takes to close a 203K loan.

I don’t see how you have proven or dispelled anything…did I miss something?

Regards,

Regards,

Regards,

19

EZ
I believe the point has been made. 203K loans take longer than a traditional FHA mortgage or a conventional construction loan. It is very difficult to predict the amount of time it takes to close a loan like a 203K because EVERY property is different. If you would like to discuss this any further my email is located at the bottom of this posting. I don’t think the readers of this site want to hear about my extensive background in FHA and construction loans. Also, how does an FHA loan offer the best value when unless the borrower goes with a 15 year FHA mortgage they are going to pay upfront MIP as well as be REQUIRED to pay MIP for 5 years or ubtil they get to 80% LTV of the original loan amount? A conventional rehab or construction loan will allow them to use the appraised value instead nof acquisition cost. This allows for little or no down payment, and if you are working with a trustworthy loan officer you are going to get a better rate than FHA. As for credit score there are mutiple national lenders that will do a conventional construction loan down to a 620. As a lender I am sure that you love FHA because it pay so well, but when it comes to the needs of the customer FHA is not always the best choice. Especially when it comes to the 203K.

20

Chris,

HUD has specific guidlines on how long it takes to close a 203k loan, and yes, it does take a little longer then a conventional construction loan, but that does not overshadow the overall value of the government’s program (BTW, you can’t use a traditional FHA loan [I assume you mean a 203b] for construction or rehab).

I am not going to speculate as to what might interest the readers of the post, but I believe any borrower faced with this decision, might find a comparison useful.

I am quite familar with variety of construction programs and or construction to perm loans available from IndyMac, National City, Bismark, etc., and stand behind my original statement, that an FHA 203k delivers the highest value.

I think you meant to say that a conventional rehab or construction to perm is based upon future appraised value (property value after rehab) and not appraised value; loans based on ARV are the only loan programs that would allow for a potential 100% financing (with grants, gift funds, etc., so does the 203k).

At this point, I am not interested in crossing swords with you and let’s just part agreeing to disagree.

I am both a direct lender and broker, and recommend loans that best serve my client and the situation (not my bottomline), but I understand that it must be difficult to compete with something you don’t offer.

P.S. MIP is cheaper then PMI
P.P.S. Even with the upfront MIP, a 203k loan oftens proves to the lowest cost of borrowing alternative to higher interest rates, lower LTV allowances and the need to refinance in the future.