Newbies- not much cash flow, but have VA loan which has ~ $425K on the COE

[Sarah Schopbach]

My husband and I are wanting to rent out our current house and purchase another house and hopefully do a 203(k) loan on it since a lot of the houses in our area are fixer-uppers. From the reading I have been doing, it would make more sense to do a 203(k) loan and then we could use the VA COE for another property down the line.

The long-term goal is to have several LTR and some STR/MTR. I would love to get some land and build our own house (with an Airbnb) but without much cash reserves, this does NOT seem like the best option for now.

If you were just starting out with not much cash reserves (due to remodeling our current house) how would you navigate the next best steps?

Thank you!

[Mitch Davidson]

@Sarah Schopbach, I agree with @Christian Longacre that you'd be better to focus on Homestyle. 203K is more of a pain for you and your contractor. And if your credit scores are in the 700's, you'll spend more per month on FHA compared to conventional, whether reno or not. Also, I agree that you'd need to be careful to focus on a home that needs repairs that will add dollar for dollar value, rather than a home that's just ugly and needs cosmetics. Otherwise, the deal will likely die due to the appraisal.

If I were in your shoes, I'd be eager to use VA for another primary, while keeping my current home in it's VA loan (assuming you have a pretty low rate), for sake of the zero-down opportunity.

Determining how much entitlement remaining is a little tricky. For example, if your updated COE says your current loan's "entitlement charged" is $77,500, the max price using zero down will be $416,200. Should you want to borrow $500,000, you'll need to put up 25% of the $83,800 excess, meaning $20,950. The $416,200 figure was arrived at by taking 25% of the current conforming limit (i.e., $726,200 x .25), subtracting $77,500 (i.e., current entitlement charged), and multiplying the result by 4.

Back to the reno loan matter, one unsavory factor is that all the moneys and work need to flow through a GC. So if you plan to do some of the work yourself, or if you plan to work with a tradesperson directly (to avoid a GC markup), a reno loan won't fit.

Regarding the HELOC topic, I've had a couple. I really like Coastal Credit Union. They'll go up to 100% LTV. That said, HELOC rates are terrible right now, like 9 and 10%, so I'd try to find another way. And even when HELOC rates are currently low, because they can shoot up quickly, you'd be wise to use HELOC money for temporary investing only. Meaning, much like private or hard money, you'd want to be sure you can sell the home or refi to pay the HELOC off quickly. Otherwise, you might end up crying the blues like many are right now. Also, if you plan to get a HELOC, I'd get it before you move out of the property. Most HELOC lenders only lend on primary residences.

Additionally, as you're like aware of, VA appraisals have a heightened sensitivity for health and safety matters. For example, I have a VA loan closing for a home in Hot Springs next week. Because the home is pre-1978, the appraiser required some chipping paint to be dealt with prior to closing. Not a big problem, but a burden for the seller. So, if the next home will be a fixer, you'll want to be sure it's still habitable.

Happy to discuss further, and to help you think about approaches and implications.