How exactly is there money for repairs with a loan? (cheapest, appraisal)
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
Say someone is approved for a $200K loan and finds a house for $125K.
How is it that they now have $75K for repairs/upgrades?
Wouldn't the bank just give enough to get the house?
Or does the offer include more than the asking price with the caveat that the seller returns the difference to you? I feel like something like this happened with my first home purchase wherein we increased the offer slightly so that they would then pay closing (or something), of course this was a small amount not enough for upgrades.
The bank will give a mortgage loan for the appraised value of the house as it is at time of purchase.
If the bank says you are good for a loan at a higher amount it can make the additional loan as a "construction loan" a "bridge loan" or a "secured loan" based on the borrowers income or other assets the bank feels covers them if the borrower defaults.
Those other kinds of loans will generally be at a higher rate than the mortgage until the upgrades are done and then the homeowner can refinance the home at a lower rate.
Or does the offer include more than the asking price with the caveat that the seller returns the difference to you?
This would be illegal in the amounts stated by the OP. Small amounts are let slide.
No sane banker will give a mortgage loan for MORE than the value a house appraises at (that's fraud), in fact many do not give 100% mortgages of the appraised value, they want borrowers to have some of their own money in the purchase.
But back in the 80s I knew a realtor who inflated appraisals so buyers got money back at closing. That game got stopped and some people went to jail and/or lost their jobs/licenses.
I don't suspect that Chip and Joanna (or their clients) are using Hard Money loans or traditional Rehab loans. Those people are not nearly stressed out enough.
If you're not on TV, there are a few different ways:
1. Pay cash for everything.
2. Purchase a distressed property that is not suitable for a "normal" mortgage loan with a Hard Money Loan. By "hard," I mean it does not conform to RESPA or traditional lending guidelines, and has fees and rates that are significantly higher because it has a shorter shelf life and significantly more risk. So, think 2-3 points (a point is a fee equal to 1% of the loan amount that is added to closing costs) and rates between 8 -15%.
You qualify for the Hard Money loan and get a liquid amount that you can use like cash to buy the home. After that, you can do a couple things. My favorite is that you work with a Hard Money lender that will also pay for your renovations, adding the cost as you progress. When the renovation is complete, you do a "normal" refinance, as the Hard Money lender has simply increased their payoff.
Or you can do a FHA or Conventional or VA Rehab loan. Each has their own rules, but basically you go through the process of refinancing, close the refi, and then you have six months to use the money that is packed into the new loan for repairs (which is held by the Title company) to do the work. Generally the work cannot begin until after you close on the Rehab loan, then Title will disburse funds in stages as the work is complete.
2. If you want to avoid Hard Money entirely, you likely cannot purchase an auction home, as traditional lending is too slow. So you find a house that needs renovation, and buy it with a Renovation purchase loan (again, FHA/Conventional "Homestyle" or VA.) You follow the same process in the paragraph above, but the seller is not paid until you close. Then, the work starts.
Depending on the opportunity, the Hard money reno is "cleanest," meaning least stress, as you're not following a laundry list of rules for the traditional loans. But the Homestyle loan is based on post-renovation value, so that is something to consider. Also VA is easier than it sounds. FHA is my least favorite due to rules, fees, and the FHA Mortgage Insurance.
Fannie Mae and Freddie Mac and FHA offer a renovation loan project which allows you to build up to $35,000 in home renovation costs into your mortgage. It works this way.
1) Find your home that needs work and get it under contract.
2) Decide which work you want to do that isn't structural (so no foundation work, cutting through subfloors, removing load bearing walls, etc).
3) Find a general contractor willing to work within the required terms of the rehab loan and have them quote the repairs.
4) Submit the repairs to the lender and then the lender orders two appraisals. One as-is and one as-done. The property must appraise for the as-done in order to qualify for the rehab loan.
5) If the property appraises for the as-done price, then the loan moves forward.
6) After closing the lender puts the rehab monies into an escrow account.
7) The contractor submits for an initial draw on the escrow account for materials. Then the contractor sends the bills for the repairs to the escrow account for reimbursement. (FHA allows only two draws so it works a bit differently).
8) The contractor has a specific amount of time to complete the repairs.
9) If the contractor doesn't use all the funds (there is a 10% holdback for overages), then the lender pays down the principal with any additional escrow funds left at the end of the repairs.
Short of doing a rehab loan (which is a real option but not an easy one), there isn't money for repairs in a loan. Which is why I always inevitably convince our lowest-income buyers NOT to try to buy the cheapest properties unless they have a lot of cash available to do the projects needed, which few do. Foreclosures and fixers are not cheap bargains for the low income.
And rehab loans are not for the DIYers. Banks will not loan people money do do their own remodels, they will require all the work be done by contractors (even demolition and garbage haul off!) and paid for in the loan, on a tight schedule. Most who want rehab loans don't realize that... or they try to get around it with boyfriends or relatives who are contractors, but that just almost never actually works out.
Short of doing a rehab loan (which is a real option but not an easy one), there isn't money for repairs in a loan. Which is why I always inevitably convince our lowest-income buyers NOT to try to buy the cheapest properties unless they have a lot of cash available to do the projects needed, which few do. Foreclosures and fixers are not cheap bargains for the low income.
And rehab loans are not for the DIYers. Banks will not loan people money do do their own remodels, they will require all the work be done by contractors (even demolition and garbage haul off!) and paid for in the loan, on a tight schedule. Most who want rehab loans don't realize that... or they try to get around it with boyfriends or relatives who are contractors, but that just almost never actually works out.
Can you even turn a profit using contractors at retail rates? My impression was that the teams working for career flippers were paid direct hourly wages (to the tune of 1/3 that of what you'd get billed from a contractor) in exchange for steady work.
I can't answer the loan / gap question but all this makes me wonder how many people got their start living in their DIY flips and the equity from the last house WAS their reno budget. In lieu of putting down a substantial down payment and getting a separate loan for the remodel, they financed as much as they could and used their cash to do the work. Is that possible?
Depends whether the house is financiable as-is.... many times if there's major repairs needed or they're bank-owned, they're not.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
