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We are in 2 years of a long-term lease and are finally recovering from a short sale/job loss which seriously damaged our credit. It's still not great (600 and 620) but I'm hoping by the time we get to the purchase it will have improved, the short sale will be off of there and several other items will have dropped off.
We want to purchase a property belonging to a friend that needs work. He just wants the mortgage balance paid off (will be about $150,000) but we want to add a master bedroom suite and the kitchen and one bathroom needs reno, so I'm thinking we would need a $250-300 loan.
We will have between 15-20% down payment at that time (spring 2020), maybe even more. Our DTI is also improving as we have been diligent in the last 5 years, moved to an area with better salaries, cut expenses, no credit cards, paid off almost everything, no car loans, no other loans except my student loan. We owe the IRS and have been making monthly installments, that's our only other big debt.
Would we even qualify for a Homestyle because of our credit or should we just go with a 203k? I've heard 203k's can be nightmares. My husband is an architect and knows builders/contractors so that part would be less stressful.
I did a 203k back in 2010. I'll try to sum up my experience and maybe you can draw your own conclusion:
House we were purchasing was foreclosed. There were some "needs" - roof and windows were 100% needs. Other things were cosmetic. We wanted to renovate the kitchen (down to the studs, including the floor and ceiling). Just to use round numbers, if the house was 200k the renovations were another 40k. The underwriters need to see an appraisal estimate of the home value after the repairs are done. They'll loan you up to 110% of that value. Meaning, if you buy a house for 200k and renovate it for 40k, they want the numbers to show the home would be worth 220k when you are done with your renovations. From what I read, the limit is 35k, but I think I was able to get 43k back in 2010.
The way the loan is supposed to work is... contractor does the work but does NOT get paid until an inspector for the bank verifies the work was done to their liking. So, you need to find contractors that are willing to work on that model. That isn't necessarily easy.
What you are NOT supposed to do (is what I wound up doing), I paid the roofing contractor with my CC and then reimbursed myself with the check from the bank after it was inspected. However, they don't cut the check to YOU. They cut the check to the contractor. So, then you have to work with the contractor to get them to sign the check over to you. Yeah, that's not simple.
They also don't want you to do DIY any of it. Now, if you find a contractor willing to work with you on this, it CAN work. That's what I did, and NOT what you should do. I hired my contractor to do the roof and windows. He probably upped the price tag a little bit for the trouble of working with me on the 203k stuff. On paper, he did the kitchen, but in reality, I did the kitchen. Even then, we didn't see a DIME of the renovation money from the bank until the work was completed. So, I carried all that cost on my CC for a month. That was unpleasant.
Also, don't do any other projects while this is going on. While we were doing the kitchen, I was laying flooring in the whole house. The kitchen was done, the flooring in the kitchen was done too, but not in the dining room or living room. Inspector came from the bank to verify the roof, windows and kitchen. While he would say that the work was done, he also noted that the house still looked like it was under heavy renovation. The flooring in two rooms wasn't done and one room I had the walls down to the studs (took down paneling and was running new wiring in the walls).
What the bank was looking for was the home to look "complete" - in that it should look like at that moment, the house was worth the extra money the bank put into it. And even though all the work we had agreed to do with the bank WAS complete, since the rest of the house looked like a project-in-progress, they denied payment until I finished up that other work that I had started on my own dime.
Let me sum up:
- They didn't give us any money up front. The renovation is broken into line items (windows, roof, kitchen) and the bank only writes checks to the contractor
- All work should be done by a contractor
- Find a contractor that will work within the 203k payment system
- Don't start any other projects while the work is going on
- Expect a higher rate, at least 1%
I think my experience would have been better if I worked within the system. I couldn't afford the kitchen if I paid the contractor to do it. Maybe I shouldn't have bought this house then The system is design to protect you, the homeowner, from getting scammed by contractors. They only get paid after an inspector checks out the work. But, contractors will likely increase their charges due to this.
If you go down this path, you'll likely want to refinance out of it the moment you can. Since the rates will be much higher than conventional loans.
Reality check.
You're in no position to be even thinking about this.
You may be optimistic but you are looking at it through rose colored glasses.
Here's all the things that are wrong.
1 - Your credit scores are crap. If you want any kind of competitive financing you'll need 750 or better.
2 - You're still in debt up to your ears. IRS and student loans. Get them paid off.
3 - You think you will have 15% to 20% down two years from now? On a $250,000 loan that's $37,500 or $50,000. While paying the IRS and student loans? That's a pipe dream.
4 - Worst of all you are contemplating buying a distressed property from "a friend." That's a recipe for disaster.
Forgive my bluntness but somebody has to wake you up to the truth.
Put aside the idea of buying a house until your credit improves, you pay off the big debts, then buy something that already has what you want. Meantime, put away as much cash as possible. Having 20% down is great, but if you are broke after that, you'll end up bankrupt.
We are in 2 years of a long-term lease and are finally recovering from a short sale/job loss which seriously damaged our credit. What was the date of the short sale? It's still not great (600 and 620) but I'm hoping by the time we get to the purchase it will have improved, the short sale will be off of there and several other items will have dropped off. Can you elaborate? The short sale will be "on there" for ten years but there are different required time frames for FHA and Conventional lending.
We want to purchase a property belonging to a friend that needs work. He just wants the mortgage balance paid off (will be about $150,000) but we want to add a master bedroom suite and the kitchen and one bathroom needs reno, so I'm thinking we would need a $250-300 loan.
We will have between 15-20% down payment at that time (spring 2020), maybe even more. Our DTI is also improving as we have been diligent in the last 5 years, moved to an area with better salaries, cut expenses, no credit cards, paid off almost everything, no car loans, no other loans except my student loan. We owe the IRS and have been making monthly installments, that's our only other big debt.
Would we even qualify for a Homestyle because of our credit or should we just go with a 203k? I've heard 203k's can be nightmares. My husband is an architect and knows builders/contractors so that part would be less stressful.
You would need both mid-scores to go up - close to 100 points. If you barely qualify for a Homestyle, the rate will be in the 6%s.
Any mortgage can be a nightmare. Any renovation loan can, as well.
Can we borrow that much for renovations?
The loan would not be a Streamline 203k. I think you should get your scores over 700 and attempt a Homestyle, but questions remain as to the date of your short sale.
Our short sale date was April 2014. I think our Experian report says it'll drop off in 2020 (I think?). It was a rental property for my stepson who we were trying to get on the right track, long story (I learned my lesson there!). He then decided he wasn't going to live there. We rented it out but turned into quagmire, I was out of work for a year, husband got new job in new city and we had to move. Couldn't keep up with mortgages and rent in new city and so the short sale in 2014. Since 2014 we've been renting and trying to save, paying off bills.
Our combined debt is about 100K. Our DTI is under 20%. We have some of the down payment saved. We are trying to save $50K. I think we can get there, we have a decent combined gross salary. should mention that although we don't have debt other than the IRS and student loans, we have a lot of monthly expenses, private school tuition, oldest in college etc so our challenge is to keep our expenses down, put away what we can in savings, watch our spending on eating out, etc. Public school where i live is not really an option, few good options, hard to get into magnet schools (although one child did get into a magnet school, so that saves us one tuition).
Husband's credit is better than mine but he has only a few open items on there, it's a spare CR.
My strategy is just waiting it out, save $ and hopefully see what the situation is in 2020. The worst case scenario is we have to leave our current home and rent another.
Our short sale date was April 2014. I think our Experian report says it'll drop off in 2020 (I think?). Doesn't matter if it still shows up on credit, you want to be four years removed from the Redemption(sale) date of the short sale. It was a rental property for my stepson who we were trying to get on the right track, long story (I learned my lesson there!). He then decided he wasn't going to live there. We rented it out but turned into quagmire, I was out of work for a year, husband got new job in new city and we had to move. Couldn't keep up with mortgages and rent in new city and so the short sale in 2014. Since 2014 we've been renting and trying to save, paying off bills.
Our combined debt is about 100K. Our DTI is under 20%.How are you calculating this? We have some of the down payment saved. We are trying to save $50K. I think we can get there, we have a decent combined gross salary. should mention that although we don't have debt other than the IRS and student loans, we have a lot of monthly expenses, private school tuition, oldest in college etc so our challenge is to keep our expenses down, put away what we can in savings, watch our spending on eating out, etc. Public school where i live is not really an option, few good options, hard to get into magnet schools (although one child did get into a magnet school, so that saves us one tuition). Why a $50k down payment? What is your price point/range?
Husband's credit is better than mine but he has only a few open items on there, it's a spare CR.
My strategy is just waiting it out, save $ and hopefully see what the situation is in 2020. What is the significance of 2020? You can (likely) buy right now.The worst case scenario is we have to leave our current home and rent another.
I would recommend you consider just buying the house and living in it. The loan balance on a $150k purchase price will be a lot easier to deal with. You do not need a master bedroom suite added. You may need to do some minor repairs to kitchens and bathrooms, but you do not need a total renovation of these.
Once you get stable with your finances, you can evaluate how to pay for the renovations you want. You may well decide to scale back your wants.
I think it's a spectacularly bad idea to launch into renovations you can't really afford and roll them into your basic mortgage when your interest rates will be high due to weak credit.
To summarize:
Buy the house.
Fix only that which poses a safety or health hazard, NOT convenience or styling improvements.
Get your finances stable and then think about renovations/add-ons/remodelings.
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The system is design to protect you, the homeowner, from getting scammed by contractors. They only get paid after an inspector checks out the work. But, contractors will likely increase their charges due to this. 
