So how do you get financing on a house that needs work?

I know we have a couple of mortgage experts on the board here...

I just had a chat with the mortgage consultant at our credit union - my wife and I were planning to write an offer on a house that is in very good condition and liveable (basically it as two full "apartments" on the seconds floor), but the first floor with the main kitchen and family room needs finishing. Basically, it has no kitchen and the subfloors want something prettier on them, plus it needs to have a bathroom finished. The idea was to buy the house, finish the first floor (90% of the work is well within our abilities) and hey presto, instant boost in equity in the house.

Looks like our credit union is only willing to close on a loan either once the downstairs is completed or if we're willing to put the money it would cost to finish the house into escrow. Trouble is, I didn't find the additional $15k-$20k it would cost to have a contractor finish the house down the back of the sofa so I could dump that into escrow for the 6-9 months it'd take us to finish the downstairs. I should also point out that the price of the house is taking the unfinished first floor into account so it's not like we're asking for a loan for more than the value of the house as it stands at the moment.

Is there any type of loan (conventional or FHA) that would allow the purchase of such a property or do we have to go back to looking at houses where the renovation work would be limited to new paint and carpet? Keep in mind I don't want to borrow the money to finish the house, but basically save up and then build it out as we go along over 6-9 months.

Escrow is the standard approach.

But it doesn't have to be in cash.

Can you borrow the money on a signature loan to put into escrow? How about from a relative or friend? (Remember, this isn't technically going to be spent, it is just going to sit there for a while)

Do you have a retirement account? Can you transfer the holdings to the bank and use it as the escrow? How about other assets? Bonds, stocks, real property, savings, etc.

Could you borrow the escrow money with another asset as collateral? A car, valuable jewelry, etc?

I respect not wanting to borrow money to finish the house. Can you justify borrowing for a short term to fund the escrow?

Bottom line- lenders want the collateral to cover the amount they are lending, and to insure that you have some skin in the game, to minimize their risk.

You didn't say how much the value of the property was discounted because of the work. If you are VERY good at cost estimating (I am, but I've been doing it 37 years), the price should be discounted AT LEAST twice the value of the repairs. 3x is a MUCH better number- 4x for the average homeowner. If it's not, you will be working for no added value (you will basically be giving a down payment in installments, with NO incentive for you at the end.

In other words, if the house need $15K- $20K worth of work to make it marketable, it should be selling for $50K-$75K under finished market value. Don't kid yourself and think you are buying a bargain if the purchase price is only $20K under the finished value. You are just saving the seller the aggravation of fixing it.

This kind of scenario scares a bank.

I have borrowed money from a bank for a house that needs work. Many times. But the basic math still needs to be: borrowed amount < value of the house AS IT SITS (minus the aggravation factor for the bank). If you default, they need to be able to take your escrow, pay someone to finish the job, and still make money. They are not in the building business, and have no interest in owning a construction project. If it can't be sold into the secondary mortgage market, they are taking an increased risk. They are NOT interested in funding your pipe dreams.

Apts upstairs become the limiting factor. You now have multi family property and regular loans don't apply.

If it was converted back to single family both FHA & Conventional loans have rehab loans for it.

What's the property like around it? Is this property conforming to the norm? Will there be an appraisal value issue?

None of the loans I know of will allow you to do the work in 6-9-12-24 months when you save the money UNLESS the house is basically livable with no major systems or structure issues. But the rehab programs give you the money to fix the house up. Well, give is the wrong word.

I one-upped SVreX's comments because you should follow his wisdom.

Sweat-equity is good. But your time is not free and it will (I have absolutely no doubt) take you longer than you think it will. Chances are likely it will cost more than you think it will too. Just sayin'.

When it comes down to it...if you have to borrow money, you have to go accept the lender's rules. Don't try to hard to work around it. The rules are there to protect them. If they are protected, to some degree you are too (as in...you won't get in over your head on a project and default or such).

Clem

One other thing I thought of is this:

That 10% (of the renovation work) you'll have to hire out. It will be hard to find someone to do that for you. Contractors (subs) are busy working for their high-volume general contractors. It's hard to get someone to come out and do small one-time jobs. They have to keep their regulars happy.

And to play the devil's advocate:

Go talk to a local-based bank...and see if they have loans that they fund and keep in-house. They have more leeway with these types of loans. They can lend where other's can't. My personal experience is that they are typically ARMs and you'll have to have a significant down payment (think 20%).

I did that with my current renovation project about 4 years ago. I kind of wish I hadn't (because I'm 4 years into a project that should have taken 2 years and I have tons left to do).

Clem

It's not that hard to find subs these days, they're pretty hungry. Five years ago it was a different story.

I think there is a loan like this called a 203k or something. Does this sound right to anyone?

SVreX wrote: Escrow is the standard approach. But it doesn't have to be in cash. Can you borrow the money on a signature loan to put into escrow? How about from a relative or friend? (Remember, this isn't technically going to be spent, it is just going to sit there for a while)

I probably can borrow part of the money from the/a bank - we're pretty conservative as to what we're spending on the house so there is scope for borrowing more, especially as we're not exactly in debt up to our eyeballs. Heck, I could give them my mostly unused credit card and it'll cover 2/3rds of the expected cost.

SVreX wrote: Do you have a retirement account? Can you transfer the holdings to the bank and use it as the escrow? How about other assets? Bonds, stocks, real property, savings, etc.

At the moment it's all 401(k) and regular savings. A lot of latter will have to be used for the downpayment, though.

SVreX wrote: Could you borrow the escrow money with another asset as collateral? A car, valuable jewelry, etc? I respect not wanting to borrow money to finish the house. Can you justify borrowing for a short term to fund the escrow?

I can probably sell the 'vette, which should cover about a third of the money needed.

SVreX wrote: You didn't say how much the value of the property was discounted because of the work. If you are VERY good at cost estimating (I am, but I've been doing it 37 years), the price should be discounted AT LEAST twice the value of the repairs. 3x is a MUCH better number- 4x for the average homeowner. If it's not, you will be working for no added value (you will basically be giving a down payment in installments, with NO incentive for you at the end. In other words, if the house need $15K- $20K worth of work to make it marketable, it should be selling for $50K-$75K under finished market value. Don't kid yourself and think you are buying a bargain if the purchase price is only $20K under the finished value. You are just saving the seller the aggravation of fixing it.

Without getting a "proper" what-if appraisal, just based on a bunch of comps and the Zillow Zestimate, we're probably looking at a discount of approx $60k on a rough estimate of $15k-$20k to finish the house.

SVreX wrote: This kind of scenario scares a bank. I have borrowed money from a bank for a house that needs work. Many times. But the basic math still needs to be: borrowed amount < value of the house AS IT SITS (minus the aggravation factor for the bank).

I'm pretty certain that is the case.

SVreX wrote: If you default, they need to be able to take your escrow, pay someone to finish the job, and still make money. They are not in the building business, and have no interest in owning a construction project. If it can't be sold into the secondary mortgage market, they are taking an increased risk. They are NOT interested in funding your pipe dreams.

That kinda makes sense.

carguy123 wrote: Apts upstairs become the limiting factor. You now have multi family property and regular loans don't apply. If it was converted back to single family both FHA & Conventional loans have rehab loans for it.

It's essentially a single family property with a mother-in-law apartment over the garage. The large upstairs "apartment" is clearly designed to be connected to the first floor - the staircase is in place, the railing upstairs is in place, it's "just" the opening for the staircase to come through that currently isn't. My assumption is that this is because they wanted to insulate themselves from the downstairs building noise and dirt. The house really doesn't make sense as a multi family property and wasn't designed as such.

carguy123 wrote: What's the property like around it? Is this property conforming to the norm? Will there be an appraisal value issue?

Appraisal shouldn't be an issue. We're GRMing the offer . The property definitely conforms to the overall norm in the area - these are all fairly large single family houses on 1-2 acre lots, most of which have some sort of mother-in-law apartment/house.

carguy123 wrote: None of the loans I know of will allow you to do the work in 6-9-12-24 months when you save the money UNLESS the house is basically livable with no major systems or structure issues.

The house is perfectly livable as is, there are no noticeable structural issues. All the utilities are present and hooked up, it has working kitchen(s), bathrooms, etc. What it basically needs is:

• The staircase opened (that's where I need a contractor)
• Some paint slapped on the walls downstairs. Not all of them, but 2 or 3 rooms
• Put a kitchen in - gas and water is in, everything is drywalled, just needs some tiles, appliances and cabinets.
• Downstairs bathroom needs tiling, sink and a toilet fitting
• About 2/3rds of the downstairs want to be carpeted or have hardwood flooring fitted.

That's pretty much it.

carguy123 wrote: But the rehab programs give you the money to fix the house up. Well, give is the wrong word.

OK. I guess I should have a word with them about that.with the local CU. Although I'm surprised that they didn't mention this type of loan when I talked to them.

Keith wrote: It's not that hard to find subs these days, they're pretty hungry. Five years ago it was a different story.

Yup. There is pretty much zero work out here at the moment.

ClemSparks wrote: And to play the devil's advocate: Go talk to a local-based bank...and see if they have loans that they fund and keep in-house. They have more leeway with these types of loans. They can lend where other's can't. My personal experience is that they are typically ARMs and you'll have to have a significant down payment (think 20%). I did that with my current renovation project about 4 years ago. I kind of wish I hadn't (because I'm 4 years into a project that should have taken 2 years and I have tons left to do).

We're going with a local CU at the moment. I really don't want to deal with a TBTF bank on this.

ARM. Yikes.

The whole thing is that it shouldn't be a multi-year project, but we're still talking 6-9 months of (some) evenings and weekends.

Say what you want about ARMs...mine has gone DOWN (significantly) after the three year fixed portion. I should have it paid off before interest rates might like to skyrocket...so I'm not concerned at this point.

Again...my ARM comment was clearly disclaimed as a devil's advocate reply. I don't recommend it...but it might work for you.

Ask me after the interest rates spike

[begins to whistle and walkes away nonchalantly with hands in pockets]

Clem

I thing this is what you are looking for.

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/203kabou

I have been looking in to this myself.

Paul B

Looks like it, thanks. Turns out that our credit union isn't licensed for the 203ks, but a mortgage broker near the office is. Might be worth having a word with them.

If you don't like the restrictions on the 203Ks have then look at the Conventional world.

OH, watch out for the 203K people. Some deal mostly or only in it because many lenders don't understand it and don't want to go to the trouble so they can sell it at a higher price. Shop around to a full spectrum lender.

In reply to ClemSparks:

Wow! I'm not sure if I've ever been one-upped before!!

In reply to BoxheadTim:

Sounds like you are on the right track.

One observation...

I think you are idealizing it a bit. From a bank's perspective, a house that is missing it's kitchen is NOT "perfectly livable". YOU may be able to live there, but it is NOT livable from a bank's perspective.

It's not even complete enough to get a CofA. They can't sell it to the average buyer.

I'd say get some quotes on completion from a contractor or two. Codes around the Tahoe watershed can be nasty.

We did it by hiring an incompetent home inspector. The trade off is that most of the work catches you by surprise like when they come to clean the chiminey and it falls off.

203K is for exactly your scenario. I do them every day as a GC. We do enough that we are completely streamlined in the process and do all the paperwork for the realtors and banks. Find a experienced 203k contractor and have them run the numbers. We have some home owners who do some of the work themselves and we do some to make it work out. It is pretty flexible to work with.

In reply to SVreX:

Just to clarify the kitchen point - both the mother-in-law apartment over the garage and the finished upstairs part of the main house have a working kitchen. I'm way too old to bbq my breakfast . It's just that the kitchen on the first floor needs to be finished. That's why I said it's liveable - the main part upstairs has two working bathrooms, a basic full kitchen and the usual living areas like bedrooms etc. They're all finished.

Interesting point re the CofA - I should probably pick our realtor's brains on that because they can't get one we probably should put in an offer at an even steeper discount.

That said, it looks like the 203(k) isn't available in that location, but only in another part of town if I interpret the HUD website correctly.

In reply to Wally:

Yeah, that reminds me of the home inspector who checked out the house I bought in the UK. You live and learn.

What's a CofA?

I think he's referring to a C of O: Certificate of Occupancy. Basically says the place is fit for human habitation. C of A may be Certificate of Acceptance, maybe a local term. IIRC that's needed when a 'rehabbed' house goes up for a mortgage, it's the bank's CYA that it really is a house they can sell if things go sour.

Yeah, I read it as C of O, too. Must drink more caffeine before posting.