Best way to finance a rehab while owner occupying?

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

6y

@Jimmy Lieu

If you are doing owner occupied (ie house hacking), have you looked into 203k reno loans? They come with their complications but would seem to meet your needs

Jimmy LieuBusiness Member

OP

Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes

6y

Originally posted by @David M.:

@Jimmy Lieu

If you are doing owner occupied (ie house hacking), have you looked into 203k reno loans? They come with their complications but would seem to meet your needs

Hi, I was told that 203k loans come with a lot of additional closing costs so it's similar to getting a hard money loan. Would you say so as well too? Basically, I know that for a 203k loan, you need to know the rehabbing costs ahead of time and there's a lot more paperwork involved for all parties.

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2 Reply

Jimmy LieuBusiness Member

OP

Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes

6y

Originally posted by @Brandon Dumbuya:

You may also be able to use a Fannie Mae HomeStyle renovation loan and put down 5% without the need to occupy the property. The down payment increases significantly if the property is more than one unit though. The interest rate I got was below 5%. Your renovation allowance would be the difference in appraised ARV and your all-in cost.

Hi, similar to the 203k loan, I think there are a lot of additional closing costs involved with a homestyle loan so it's similar to getting a hard money loan. Would you say so as well too? Basically, I know that for this type of loan, you need to know the rehabbing costs ahead of time and there's a lot more paperwork involved for all parties.

Would you say getting a traditional rehab loan would be the better choice? Or the homestyle loan?

Jimmy Lieu, Red 1 Realty4.9120 Reviews

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

6y

Oh, the reno loans come with tons of restrictions/costs. You need to have one GC, which cant be you. The estimates have to be formal and detailed so most contractors won’t be up to that level of professionalism. And those estimates have to be done and approved before you get the loan. So it can be nerve wracking to see if you make closing in time. that’s why you hear of “certified” 203k contractors , but there is no certification. When you want to make a draw, you generally need to pay for another inspector (not the building / plumbing/electrical inspector) to come out and see the work was done and properly before the bank sends money..

The big issue with house hacking and hml is the occupation. Reno loans require owner-occupation. Hml requires non-owner-occupied. that’s why hml does not fit the house hacking model.

Otherwise, hml has very little paperwork, you have your own choice of GC, even if it’s yourself. However, the loan is interest only for 6-12 months then there is a balloon payment. So, you have to refi into a conforming loan at the end. So, you need to be able to qualify. You also need to be able to finish the remodel in time and on budget.

The “average” homeowner can’t take on the risks of the hml, not to mention need a place to live.

does this help?

Jimmy LieuBusiness Member

OP

Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes

6y

Originally posted by @David M.:

Oh, the reno loans come with tons of restrictions/costs. You need to have one GC, which cant be you. The estimates have to be formal and detailed so most contractors won’t be up to that level of professionalism. And those estimates have to be done and approved before you get the loan. So it can be nerve wracking to see if you make closing in time. that’s why you hear of “certified” 203k contractors , but there is no certification. When you want to make a draw, you generally need to pay for another inspector (not the building / plumbing/electrical inspector) to come out and see the work was done and properly before the bank sends money..

The big issue with house hacking and hml is the occupation. Reno loans require owner-occupation. Hml requires non-owner-occupied. that’s why hml does not fit the house hacking model.

Otherwise, hml has very little paperwork, you have your own choice of GC, even if it’s yourself. However, the loan is interest only for 6-12 months then there is a balloon payment. So, you have to refi into a conforming loan at the end. So, you need to be able to qualify. You also need to be able to finish the remodel in time and on budget.

The “average” homeowner can’t take on the risks of the hml, not to mention need a place to live.

does this help?

Hi David,

Yes, that answer was very elaborate and helped a lot. Yeah, from the sounds of it, a 203k and homestyle loan sound like quite a lot of work and seems as though the closing costs would probably overall cost just as much as a HML. So just making sure, but because I would be house hacking, traditional rehab loan would be my best option right?

But if I wasn't owner occupying, then a HML would be my best option?

I just want to make sure I fully understood that. Thank you so much and your response has helped a lot!

Jimmy Lieu, Red 1 Realty4.9120 Reviews

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

6y

Yup. 203k renovation loan requires owner-occupied --- if it helps, its really a FHA with 203k reno...

HML can't have owner occupying.

The closing costs should really be the same. Its just the cost of getting the loan and the actual cost of the loans themselves (i.e. interest rate). Then, the operating costs as discussed.

Philip Ganz

Lender · Fort Lauderdale · Member since 2017 · 190 posts · 117 votes

6y

@Jimmy Lieu The FHA 203k loan is superior to the Fannie Mae HomeStle for single and multis because

1) You can go to 110% with FHA 203k of the ARV vs 95% of Homestyle

2) You only need 3.5% down payment versus 5.0% down payment

3) a HUD inspector is involved upfront helping you make better decisions

Stephanie P.Pro Member

Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes

6y

Couple of things.

An FHA loan does not cost as much as a hard money loan. Hard money for purchase and acquisition is about 10% and cost about 3 points. I've seen some higher and some lower, but that's about average. You'll be putting down at least 10% of the purchase price and in some cases 20% of the loan to cost. Depends on the lender.

Either way, that's a lot more expensive than 3.5% down and rolling the renovation cost into the loan.

If you're house hacking, either do FHA or conventional financing with a little more down. Hard money is for non owner as others have said.

Stephanie

Jimmy LieuBusiness Member

OP

Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes

6y

Originally posted by @Stephanie P.:

Couple of things.

An FHA loan does not cost as much as a hard money loan. Hard money for purchase and acquisition is about 10% and cost about 3 points. I've seen some higher and some lower, but that's about average. You'll be putting down at least 10% of the purchase price and in some cases 20% of the loan to cost. Depends on the lender.

Either way, that's a lot more expensive than 3.5% down and rolling the renovation cost into the loan.

If you're house hacking, either do FHA or conventional financing with a little more down. Hard money is for non owner as others have said.

Stephanie

Hi, since I am looking at house hacking and owner occupying the property, wouldn't a separate traditional rehab loan be the best option for me? Over a 203k loan?

I was told that interest rates for a traditional rehab loan could range from 5-10% based on risk and etc.

From what I've heard so far, traditional rehab loans seem to be much better because they don't involve as much additional paperwork and closing costs as a 203k loan and a 5-10% interest rate doesn't seem that bad at all!

For my house hacking strategy, I was definitely looking into doing 5% down with conventional financing or Home Possible and then using a traditional rehab loan for financing the rehab.

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Stephanie P.Pro Member

Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes

6y

Not sure about 5-10% interest rates. This isn't the 80's. FHA loans are in the 2's and 3's

Home Possible is for first time home buyers generally, but it doesn't have a rehab component. With Home Possible, the borrowers' annual income cannot exceed 100 percent of the area median income (AMI) or a higher percentage in designated high-cost areas.
If you can do the Homestyle Renovation loan from Fannie Mae, it's a better deal than FHA just because of the mortgage insurance.

Don't be cowed by the paperwork on a 203K. If you have a good lender, they can walk you through it.

Jimmy LieuBusiness Member

OP

Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes

6y

Originally posted by @Stephanie P.:

Not sure about 5-10% interest rates. This isn't the 80's. FHA loans are in the 2's and 3's

Home Possible is for first time home buyers generally, but it doesn't have a rehab component. With Home Possible, the borrowers' annual income cannot exceed 100 percent of the area median income (AMI) or a higher percentage in designated high-cost areas.
If you can do the Homestyle Renovation loan from Fannie Mae, it's a better deal than FHA just because of the mortgage insurance.

Don't be cowed by the paperwork on a 203K. If you have a good lender, they can walk you through it.

Hi Stephanie.

Oh when I said a traditional rehab loan, I was referring to a completely separate loan from the home mortgage loan (i might've misunderstood what a traditional rehab loan is). So after I close the property, I was thinking of going to a lender or bank and asking for a new loan just for rehabbing. Is that how it works? Is that possible?

Or is the only way to get a rehab loan through a 203k loan or homestyle loan?

And just making sure but you are saying a 203k loan is the best option for financing a rehab?

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Stephanie P.Pro Member

Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes

6y

The 203k and homestyle renovation loan are the final product. They get you the acquisition money and the rehab money in one loan and are in the 3's for a 30 year fixed. It's your best way to get the rehab financed over a long period of time.

Jimmy LieuBusiness Member

OP

Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes

6y

Originally posted by @Stephanie P.:

The 203k and homestyle renovation loan are the final product. They get you the acquisition money and the rehab money in one loan and are in the 3's for a 30 year fixed. It's your best way to get the rehab financed over a long period of time.

Thank you for your reply Stephanie. Just a quick question, but can't I just get a separate loan? After I close the property, can't I just get a completely separate loan specifically for a rehab? After I have closed the property with conventional financing and let's say I want 20k for rehabbing after close, can't I go to a lender or bank or portfolio lender who can give me a loan for my rehab project? And after the rehab project, get the property appraised and do a refinance and pay off the loan?

Would it me smart for me to do a separate new loan for rehabbing? Or are you saying a 203k loan or home style loan is definitely the way better option?

Jimmy Lieu, Red 1 Realty4.9120 Reviews

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

6y

I don't think you are understanding. A second loan would mean a second lien. Its riskier for the lender and thus higher interest rate and tougher to get. Furthermore, you'd be paying for another loan as in fee to lender (they have to make money somehow) and another closing, for example. Also, why would they lend you another $20k on the property? Did you buy that much under the market that there is that much equity left to be loaned out (when considering LTV)? Conventional loans aren't going to consider a future apraissed value.

Jimmy LieuBusiness Member

OP

Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes

6y

Originally posted by @David M.:

I don't think you are understanding. A second loan would mean a second lien. Its riskier for the lender and thus higher interest rate and tougher to get. Furthermore, you'd be paying for another loan as in fee to lender (they have to make money somehow) and another closing, for example. Also, why would they lend you another $20k on the property? Did you buy that much under the market that there is that much equity left to be loaned out (when considering LTV)? Conventional loans aren't going to consider a future apraissed value.

Hi David,

Oh, that was exactly the explanation I was looking for. That makes complete sense. :)

Jimmy Lieu, Red 1 Realty4.9120 Reviews

Stephanie P.Pro Member

Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes

6y

You can go up to 110% of the value with a 203K loan. Most conventional lenders, if you're going for a 2nd mortgage, would only go to 90% max (I would think). The days of the 125% 2nds are way behind us. Thanks @David M. for the assist on the explanation.:) I guess I wasn't clear.

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

6y

@Stephanie P.

Hey no problem! Your explanation was clear, but I think Jimmy Lieu needs to get his head wrapped around how real estate loans are structured. We know they don't work like a credit card... :)

Matt Nico

Member since 2019 · 448 posts · 306 votes

6y

@Jimmy Lieu

I have used a 0% APR credit card for rehabbing. I bought a house with an owner occupied 5% conventional. Moved into it, used the credit card for rehab. A year and a half later i gained 50k in equity, paid my card off, generating cashflow, and the PMI should drop off within another year.

Just be strategic about it. You probably have options if you are savvy enough to think of something creative.

Happy Housing,

Matt

Jacob Trogan

Lender · Kansas City, MO · Member since 2016 · 141 posts · 71 votes

4y

Quote from @Stephanie P.:

Not sure about 5-10% interest rates. This isn't the 80's. FHA loans are in the 2's and 3's

Home Possible is for first time home buyers generally, but it doesn't have a rehab component. With Home Possible, the borrowers' annual income cannot exceed 100 percent of the area median income (AMI) or a higher percentage in designated high-cost areas.
If you can do the Homestyle Renovation loan from Fannie Mae, it's a better deal than FHA just because of the mortgage insurance.

Don't be cowed by the paperwork on a 203K. If you have a good lender, they can walk you through it.

I think I responded to you on another thread and even though this thread is old I found this comment funny... haha it aged poorly we love those interest rates