Dumb home finance question :) (sale, foreclosures, mortgage broker)

[Brookside]

I'm embarrassed by how limited my understanding of home finance rules in TX are! Here's the situation:

1). We are considering a move to another neighborhood. Sale of our existing house = not a problem.
2). All houses in our price range in our target nabe will need upgrading/rehab.

Here's the question:

If we are approved for, say, $500k, but purchase a home for $350k, can we use the "extra" $150k for repairs to the home we purchase?

Or is there some rule that the purchased home must be worth $500k after repairs?

Many thanks!

[TurtleCreek80]

Originally Posted by Brookside

I'm embarrassed by how limited my understanding of home finance rules in TX are! Here's the situation:

1). We are considering a move to another neighborhood. Sale of our existing house = not a problem.
2). All houses in our price range in our target nabe will need upgrading/rehab.

Here's the question:

If we are approved for, say, $500k, but purchase a home for $350k, can we use the "extra" $150k for repairs to the home we purchase?

Or is there some rule that the purchased home must be worth $500k after repairs?

Many thanks!

No, it does not work like that. The only way you can use your home to finance a remodel is with a home equity loan, but you need to have greater than 20% equity to do so. Banks won't let you take out a mortgage for more than the home is worth (and usually you can't take out a loan for more than 80-90% of the home's value). Future value of improvements is not something a bank would cônsider underwriting.

Your options (and not all of these are good options...) to pay for the remodel are:
1. Pay cash. Tap savings accounts, investments, family, etc to raise the cash.

2. Credit cards

3. Attempt to get an unsecured personal loan from your bank.


There are some programs for that allow buyers to roll remodels/ repairs into the mortgage but they are for lower priced housing (think rehabbing foreclosures in disrepair). Some of these programs explicitly state what can and cannot be done with the loan- ie, doesn't cover swimming pool installations or other higher end upgrades.

[WorldKlas]

Ask the mortgage company. There are some rehab loans available under very narrow rules.

[GBCommenter]

My understanding agrees with what the others said, a conventional loan cannot be used for reno or repairs - just the appraised value of the home (or the allowed amount thereof as TC was mentioning).

That said, I had once Googled 203k loans, which are loans that seem to be available for purchase and renovations. I know little more than what I searched, but also as TC mentioned there are specific repairs the loan could be used on - seems usually for permanent repairs/remodel to the structure itself (in other words, not appliances that could be removed).

[Austrian2]

I know someone who offered an allowance of $50,000 on his home instead of renovating it himself. He had plenty of offers next day because buyers prefer to make changes themselves to meet their needs and taste. It was appraised for $550,000 but listed for $600,000. He sold it for asking and wrote a check to his buyer.

[dating_houses]

Sounds like you need a 203k loan. Not all mortgage brokerages offer them, but some do. Just Google it. Good luck!

[GBCommenter]

Originally Posted by Austrian2

I know someone who offered an allowance of $50,000 on his home instead of renovating it himself. He had plenty of offers next day because buyers prefer to make changes themselves to meet their needs and taste. It was appraised for $550,000 but listed for $600,000. He sold it for asking and wrote a check to his buyer.

Interesting concept that obviously worked in that situation.

Only concerns I would raise are:

Will a bank give a loan for $50,000 over appraised value?

Would you end up paying a higher interest rate if they do - making it not a great financial decision to get locked into a higher interest for potentially decades to get a quick loan upfront?

Finally, is it worth the higher loan payment?

Those are the questions I'd ask myself...

[jdallas]

Originally Posted by GBCommenter

Interesting concept that obviously worked in that situation.

Only concerns I would raise are:

Will a bank give a loan for $50,000 over appraised value?

Would you end up paying a higher interest rate if they do - making it not a great financial decision to get locked into a higher interest for potentially decades to get a quick loan upfront?

Finally, is it worth the higher loan payment?

Those are the questions I'd ask myself...

Cash buyers negate all of those concerns.

[Lowexpectations]

Originally Posted by GBCommenter

Interesting concept that obviously worked in that situation.

Only concerns I would raise are:

Will a bank give a loan for $50,000 over appraised value?

Would you end up paying a higher interest rate if they do - making it not a great financial decision to get locked into a higher interest for potentially decades to get a quick loan upfront?

Finally, is it worth the higher loan payment?

Those are the questions I'd ask myself...

In most cases the bank will not lend more than the appraised value

[Brookside]

Thanks for all the replies. The rules differ from state to state. In CA for example, they will loan the additional amount as long as the home appraises for total amount loaned.

I will check out 203k's - thanks!