Bridge loans and/or creative financing?

Question

Hi guys! I’m still under contract to buy a property, and the plan was to create a studio apartment in the back of the house while the current tenant rides out their lease. However, the underwriters won’t approve the loan without a lease termination letter for a 60 day notice, and the current tenant must move out. The owner doesn’t want to send the tenant a lease termination letter based on liability in the post-covid climate(he discussed with his lawyer and no amount of earnest money will make him comfortable to give the tenant notice). The tenant’s lease isn’t up until December, and the bank won’t consider me as being the primary resident if I’m living in the studio, as the tenant would be still occupying the main house. The seller agent suggested a bridge loan, but I’d need my cash to do a renovation on the studio, so I can’t do a huge down payment... does anyone have experience with any creative financing options regarding bridge loans?

Matt Devincenzo · Answer

I'd talk to another lender. I'm not aware of a req that you OO the largest unit, just that you OO the property in general which it seems you have every intention and plan of doing. So see if another lender accepts that OO of the studio, I don't see why they can't...the termination letter is generally a no go Covid or not. The tenant has a lease until Dec, and while they could choose to agree to vacate, they are 100% within their rights to refuse simply because they want to fulfill their lease. So I wouldn't even consider that as an option if I was the seller.

Matt Devincenzo · Answer

I just read your other post...seems the issue is more that the 'studio' doesn't exist yet, which is why the lender won't accept the OO on that unit since there is little to no assurance that you complete the work. So revised plan, the product you want/need does exist. You need to get a qualification for either an FHA 203K, Homestyle Renovation or ChoiceRenovation loan product. I'm not sure of the specific limits on each, but I know that there are options which allow more than just paint and cosmetic upgrades.

Paul Welden · Answer

@Mary Firmin Congrats! Sounds like a portfolio loan which means the bank can make up their own rules/guidelines. Nice work!

Mary Firmin · Answer

Thanks for all the helpful info guys! My loan officer ended up being a total rock star and going all the way to the president of the bank to make an exception for me! I had to include a copy of the lease and write a letter of intent to occupy as of January 2nd, and the loan was accepted by the bank! It’s also a healthcare professionals loan, so it’s 0% down and no MORTGAGE INSURANCE 😱😍 I can hardly believe my good luck! So now I can finance the studio with cash!

Stephanie P. · Answer

@Mary FirminYou're going to be required to owner occupy the property within 6 months. Wait until the end of June to close and you should be good. If you need a lender that will do this, PM me. We won't because it's owner occupied, but I know some that will.Stephanie

Paul Welden · Answer

@Mary FirminLook into rehab loan options such as the FHA 203k and Fannie Mae Homestyle and Freddie Mac CHOICERenovation. All of them allow for purchase + rehab money to be rolled into 1 single close loan. But the FHA 203k may not be possible because you can't actually live in the property now because of the tenant. So, you may have to go the conventional rehab loan route as a non-owner occupied borrower and include the studio construction $$$ into the loan. If you could use the 203k (don't really think it's possible b/c of the tenant), there are 2 versions - Limited 203k up to $35k rehab money and Standard 203k up to $1.4 Million for rehab money. For conventional rehab loans, you are capped at the conforming loan limits and rehab money allotted is typically less than the Standard 203k. Hope this helps!

Caroline Gerardo · Answer

You write "to create a studio apartment," meaning today this is a single family house with no other unit. The Underwriter is correct you cannot get an owner occupied low rate government loan on a house that you cannot owner occupy. A bridge loan doesn't apply, you need two properties that you own with enough equity to record the loan on both properties, that is not possible unless you currently own real estate that has a large percentage of equity. You can change the loan to requesting a non owner occupied rental purchase which is the truth of the situation. Your rate will jump up. You need 20% down. The structure of your deal is based on fiction. If you are past contingency date the seller has the right to keep your earnest money. When you wrote the offer you should have contractual wording that seller had to get tenant out. Suggestion: offer the tenant a lump of money to buy out of the lease, do it fast. Write a note: I plan to close on X date. I will give you $9000 cash to move out the day before. It's that or close with higher rate, do the studio with some kind of other loan, refinance to owner occupied when you are living there. @Matt Devincenzo FHA wont allow her to close on single family with tenant who has a lease for 8 more months. The 203k with $35000 cash to build a studio could be a good refinance option when she closes with investment loan, removes tenant, refinances. However she will be stuck with 1.75 Mortgage Insurance for life of loan until she can get loan to value down enough to refinance AGAIN to conventional, but FHA rate will be far far lower than a non owner occupied investment loan in payment and rate.