What is the best way to finance a rehab. Roll it into mortgage?

Question

I’m new to this so I’m going t on be buying my first rental with an FHA. Living in it while rehab and then renting it out when finished with rehab. What is the questions I need to ask my bank in order to get the finances and how should I finance the rehab? New to all of this and anxious to learn and get started.

Rico Nasol · Answer

@Wyatt Short you should look into the FHA 203k loan. This is exactly what you are referencing. They roll in the price and rehab into one loan. This link will give you most of the info you'll need.

Pimwadee Limsirichai · Answer

How long do you plan to live in it/keep it?

How much of the work are you doing yourself?

Which jobs do you plan to hire out? Drywall? Paint? Kitchen remodel?

Do you have a plan for your laundry list of things you want done to the house for the rehab? Is it reasonable? How much can be safely youtube'd?

If you have these things figured out, you should be able to get a decent estimate (by trolling around the internet) for the work in your area, or how much it would cost to DIY it well. Remember to only take on projects you're comfortable with. A poor DIY will end up costing you more to fix, and if not fixed, will lower the value of the house.

If you're thinking about credit cards, consider things like the Home Depot credit card that allows you xx months to pay off a minimum purchase of $xx with no interest. Try to save your credit score where you can so you can continue to qualify for loans. Aim to NEVER pay interest on a credit card. This means paying off your balance (not just the minimum) in the appropriate time period (depends on card) so they're not charging your interest on a rolling balance.

Based on your timeline, if you have the funds to float the rehab, I suggest doing a little at a time when you've saved enough cash to fund all the mini projects of the remodel. This way you don't owe anyone any interest on your rehab. If you don't think you can amass the funds to rehab, then consider borrowing at a low interest rate. Don't rule out private money, or pooling friends and family if you're open to that. You can likely get a lower interest rate out of this than most personal bank loans.

Very importantly: If this is your first rehab project, and you're not hiring a GC, make sure to take the time and figure out the order to do your projects. In the wrong order, you'll pay for stuff twice. Don't paint the walls, then rip up the tile, because you'll have to paint the walls again after reinstalling the floor.

If you're using this house as an investment, treat it like an investment. Don't get attached. Rehab it to market trends, not your personal preferences. If you're thinking about renting or selling this property shortly, this is not your forever home. So be sure to maintain this mindset when you are making your project list. I hope this doesn't come off too blunt! As a realtor/investor, I work with a lot of new investors, and these are the most common pitfalls I come across. We want to build you up, not let you fall flat on your face :) Great question, OP! It takes courage to ask, and it shows you have initiative, so Bravo!

Dave Spooner · Answer

@Wyatt Short The FHA 203k is an excellent way to go. The only thing to keep in mind - they won't finance any of the rehab you do yourself. In fact, you're not technically permitted to do any work on the property until your certified 203k contractor is complete with their work.

But as Rico mentioned, it's an incredibly useful way to do what you're looking for and get started in your first multi-family.

Steven Foster Wilson · Answer

I did it on 2 properties so far. If you're responsible, its like cheap private money (that will wreck your credit score lol)

David M. · Answer

@Wyatt Short

Okay.  Is your PMI/MI cheaper on a conventional?  Is your rate any better?  The fact that you qualify for FHA doesn't mean its the best loan for you.   its up to you...

The "best" time to refi can sort of depend.  You really want to do a cash out refi when the property has appreciated in value.  So, if you purchase the property under value, perhaps remodel it, that it will have a higher value.  If you cashout refi you can perhaps get your originial capital out.  Thats the basics of the BRRRR method that is advertised around a lot.

The usual restriction is the "6 month seasoning" period.  Its really an Early Payoff Penalty (not to be confused with a Pre-Payment Penalty).  This penalty is assessed against the lender.  If you don't keep the loan for 6 payments (about 6 months and a bit), the originator of the loan is assessed a penalty that equates to really all their profits and costs.  So, that's why you need to keep the loan for at least6 months.  This is for conforming residential loans.

Also, with any Government backed loan, the mortgage insurance never comes off the loan.  Only on a conventional loan does the pmi come off.  Just something out to consider.  However, for a 3.5% down (FHA) loan, I think it normally takes about 8'ish years to make it up back to 20% following the std amortized payment schedule...

Wyatt Short · Answer

@David M. Right now with my lender I qualify for a 2.625% rate on an FHA loan.

Wyatt Short · Answer

@Steven Wilson Lol. Thanks man! When is the best time to do the Refi?

Steven Foster Wilson · Answer

Have you heard of google? Lol literally google 0%apr credit card and 100 options will pop up. Find the one with the longest term.

a refinance cash out can help you access some sweat equity and maybe even lower your rate.

David M. · Answer

@Wyatt Short

The 203k loan option is a powerful product.  However, just be forewarned that getting it "off the ground" will be tricky.  Your contractor will need to give detailed proposals which has to be approved by the bank.  Getting a loan is stressful itself since the bank (ie underwriting) will be coming back periodically asking for more information.  Since your closing date will be looming closer and closer, you will have to gather your docs and respond as quickly as possible.  Then wait (potentially a week or more) to hear if they have another question.

Any licensed/registered Contractors in your State/municipality is eligible to support you.  There are GC's out there who claim to be 203k certified.  It just means that they are claiming they have experience with the loan process.

The 203k product requires that you hire a general contractor through which to hire/subcontract ALL the work.  That's a downside to the 203k.  You can't even hire your own subs yourself to avoid the GC fees.  This is where the 203k sometimes really isn't the "best" way to go.

The 0% APR credit card is a way to go.  Risky, but a way to go.  You just need to troll around the internet looking for credit cards offering a 0% APR introductory offer for 6mo or 12mo.  Of course, you need to apply and actually qualify.  There are websites that pull together the credit cards available.  Just Google it...

You definitely need a good lender.  Honestly, if you can only qualify for a FHA loan (have you even talked to a good lender, yet?) then your credit score may not be sufficient for a credit card.  I should mention, the FHA loan product isn't always the way to go.  Owner-occupied conventional loans typically go as low as 5% and sometimes as low as 3% in special conditions.  Depending on where you are purchasing and other criteria, you could use a USDA loan and do 0% down.

Lastly, major banks aren't the best choice, necessarily, for loans anymore.  A local bank or credit union is an option for more flexible lending.  A good mortgage lender looks to be primary way to go.  If you need more creative financing, you might need to find a mortgage broker.

Good luck.

Wyatt Short · Answer

@Steven Wilson what does the refinance do? I’m super new to this and really wanting to learn more about different ways of investing.

What is the best way to finance a rehab. Roll it into mortgage?

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