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My wife and I are going to look at a home tomorrow that is very promising, but the house appears to need major renovations. The price is very attractive and it is on 5 acres of land. After doing a conventional loan on the house we will have ~$110k in cash left over, which will likely not be enough for the renovations as a garage needs to be added also.
Is it possible to take a loan out for higher than the purchase price to do renovations with? Even if it is like a new build loan where you get money when steps are completed that would be fine as we have cash to do the majority of the renovations before we would need more to finish.
If that is not possible (which I don't think it is), our other options are to do a cash-out refi for a higher amount to get money for the rest of the renovations or to do a 2nd mortgage, correct?
There are 2 basic types of renovation loans – the FHA 203k loan and the Homestyle loan. Both options will lend you money based on the fair market value of the home after the improvements have been made.
Yes, there are programs where you can get a rehab loan. Some call it a "Mortgage Plus" because it's your basic mortgage plus reno money.
However, you need to really look into the programs to see if you want the headache of them. They will charge you a higher interest rate because it's a higher risk loan. Also, you have to use contractors that are on their approved list. You cannot DIY it or use just any contractor you want. You also have a time limit, so you can't casually do updates over months or years if they's what you want.
There are many rules and they can take 90 days to close. Do not give yourself a 45 day closing period and think that's plenty of time as you'll be completely stressed from day 1. 60 days should be enough, but too many people need extensions from then, so you might as well go in it with worse case scenario for 90 days and prepare the seller to possibly close earlier. Give yourself and your lender time to get through the process as you'll have to get many bids before a final number can be given.
My wife and I are going to look at a home tomorrow that is very promising, but the house appears to need major renovations. The price is very attractive and it is on 5 acres of land. After doing a conventional loan on the house we will have ~$110k in cash left over, which will likely not be enough for the renovations as a garage needs to be added also.
Is it possible to take a loan out for higher than the purchase price to do renovations with? Even if it is like a new build loan where you get money when steps are completed that would be fine as we have cash to do the majority of the renovations before we would need more to finish.
If that is not possible (which I don't think it is), our other options are to do a cash-out refi for a higher amount to get money for the rest of the renovations or to do a 2nd mortgage, correct?
One question is: Are the needed renovations germane to repair or updating the home? Can you get a mortgage at all with the house in its current condition?
What are the present terms for your loan, ie., price, preferred down payment?
I'm guessing with your amount of cash on hand that you likely have a credit profile more suited for a Conventional Homestyle mortgage, which still has some headaches as referenced by F-West, but is much easier than the FHA 203k.
Homestyle: you get bids for all of the work from no more than 3 contractors (4+=need a GC). Appraiser calculates Future Value based on post-renovation work. It's a normal purchase from there, and should be executed in 30 days, BUT changes coming 10/3 for all mortgages will necessitate a 45-day Escrow Period, just to keep you sane. Then, after you close, the contractors have six months to complete the work.
Homestyle allows for a broader amount of renovation, and will likely keep you from Mortgage Insurance.
What is the current price of the home, your preferred total out-of-pocket, and can you list the type and cost of the work you want to do on it?
One question is: Are the needed renovations germane to repair or updating the home? Can you get a mortgage at all with the house in its current condition?
What are the present terms for your loan, ie., price, preferred down payment?
I'm guessing with your amount of cash on hand that you likely have a credit profile more suited for a Conventional Homestyle mortgage, which still has some headaches as referenced by F-West, but is much easier than the FHA 203k.
Homestyle: you get bids for all of the work from no more than 3 contractors (4+=need a GC). Appraiser calculates Future Value based on post-renovation work. It's a normal purchase from there, and should be executed in 30 days, BUT changes coming 10/3 for all mortgages will necessitate a 45-day Escrow Period, just to keep you sane. Then, after you close, the contractors have six months to complete the work.
Homestyle allows for a broader amount of renovation, and will likely keep you from Mortgage Insurance.
What is the current price of the home, your preferred total out-of-pocket, and can you list the type and cost of the work you want to do on it?
I will know more about the house tomorrow after we are able to look at the inside. Price of the house is $177k. My credit score and income are good, so a loan will not be an issue.
In a homestyle loan am I able to DIY any of it? Most of the work I would have contractors do, but kitchens and bathrooms are my specialty, so I would do those as well as finishing work, like baseboards, moulding, etc.
I will know more about the house tomorrow after we are able to look at the inside. Price of the house is $177k. My credit score and income are good, so a loan will not be an issue.
In a homestyle loan am I able to DIY any of it? Most of the work I would have contractors do, but kitchens and bathrooms are my specialty, so I would do those as well as finishing work, like baseboards, moulding, etc.
DIY Renovations trigger a limitation wherin the DIY work expense is limited to 10% of the post-rehab completed value. If you use contractors for everything, you can include renovation expenses that total 50% of the completed value.
Also, DIY= no labor expense may be included. And you can only DIY 1-unit owner occupied homes.
The question I have posed internally, is "can this be compartmentalized," ie., can you DIY within 10% rule, and use contractors up to 50% of post-rehab value. It makes sense that you could, but I'm not going to expect these guidelines to make sense.
My wife and I are going to look at a home tomorrow that is very promising, but the house appears to need major renovations. The price is very attractive and it is on 5 acres of land. After doing a conventional loan on the house we will have ~$110k in cash left over, which will likely not be enough for the renovations as a garage needs to be added also.
Is it possible to take a loan out for higher than the purchase price to do renovations with? Even if it is like a new build loan where you get money when steps are completed that would be fine as we have cash to do the majority of the renovations before we would need more to finish.
If that is not possible (which I don't think it is), our other options are to do a cash-out refi for a higher amount to get money for the rest of the renovations or to do a 2nd mortgage, correct?
From the limited info you give, it sounds like you would not be best served by a renovation loan. Take out the conventional loan to purchase the home, do your renovations, then with the improved value you will have enough equity to get a home equity loan to build the garage.
DIT follow up: Many lenders will not allow any DIY at all. Even though FNMA technically allows it, Lenders, by and large, do not wish to bear that risk.
Great, thanks everyone! That house ended up being a no-go but we are still on the hunt and this will help us. Thanks again!
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