What do buyers mean when they say...

Question

I know watching HGTV is not real life, I get it.  But a potential buyer qualified for a $550K home but they selected a home that was $499K.  Then the buyer said "oh great now we can use the other 50k to make upgrades like paint, fixtures and floors".  Can they use the rest of the pre-approve loan to make changes to a turnkey home?  If so how does that work? Are they using 203k loan, construction loan, or something else entirely?

Dave Spooner · Answer

@Robert Carter Lot's of banks will lend an additional construction budget. Some of the products mentioned like the 203k and Homestyle will do it, but there are other financing options. You typically just have to put a minimum of 20% down on the construction budget if you go direct (i.e. not a 203k). So it's more expensive up front, but you can still get the money!

Bill Rich · Answer

How do you not see it that way? The homeowner is literally creating equity in the home by doing the work and that subsequent work is being financed through the loan.....thus getting the cash needed to do the work.

David M. · Answer

@Bill Rich

I see what you mean, but I suppose I disagree on the terminology.  The 203k loan is proving cash “above market value” so you really arent cashing out.  They are loaning additional funds for you to creat equity by doing capital improvements.  I just don’t see that as an “equity cash out”

Bill Rich · Answer

David thats actually incorrect as you can take additional cash out of the equity of the home to include home improvements. As the original post made reference to, this is a 203k or HoneStyle renovation mortgage.

Robert Carter · Answer

thanks everyone I appreciate your feedback.  It seems to come up a lot in some of these HGTV shows, I get this puzzle look every time.

Paul Welden · Answer

They are doing a renovation loan like the FHA 203k, or the Fannie Mae Homestyle, or the Freddie Mac ChoiceRenovation. All of these allow the borrower to include the purchase price (or refi) + rehab money into one loan.

Todd Rasmussen · Answer

@Robert Carter

They either are using a 203k or similar loan or just ignorant to the lending process. I think the odds of it being one or the other are split right down the middle.

David M. · Answer

@Robert Carter

I’m guessing it’s “TV filler.”  You can’t do a cash out purchase like that as your post seems to indicate you understand.  Its a very common misunderstanding how mortgage lending works as opposed to getting a credit card, for example.

I’ve surmised there are a lot of things those flipping shoes aren’t telling you.  Those comments are just fluff for the viewers in my opinikn

What do buyers mean when they say...

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