203k Rehab Loan to buy a HUD home?

Question

Good evening everyone! So I have been trying to access the HUD webpage but it appears to be down, I'm getting the error "Page Not Found. We're sorry! This page cannot be found. Please visit the HUD Homepage or use the search box above to find what you are looking for."

So I figured I'd ask here in hopes that someone could help me out.

Ok, so here's the deal...I'm new to Real Estate. I've got the basics down (I think) and I am seeking more knowledge about the subject. One of the big problems I'm having is "where to get money"? I see a lot of potential in purchasing HUD homes, re-habbing them, and either renting them out or selling them after it's fixed up. Of course I do my research to the best of my ability (I am not a licensed REA, so I can't access the MLS) by using Realtor.com. I look for homes that have SOLD within the last 6 months within a .25 mile radius of the HUD home I'm looking to buy, so  I can better price my bid...I know how to install kitchens, lay carpet, paint, ... pretty much everything cosmetic, so total cost put into the house will be cheaper then hiring a contractor....Anyway, if I plan on selling the house after I get it at a good deal, I'd like to tell cash buyers in my area first to see if they're interested, or put it on the market, all for ~15% cheaper then retail value. My stipulations would be I have to make at least 15k profit minimum if I were to sell it outright after fixing it up, otherwise I'd look at other options.....

Anyway, my only qualm right now is, Where do I get the money for this? I am too new to the business and I dont know of any private lenders who'd lend to me because I have no track record, and I know banks don't really like giving out loans for home repair purposes. What are my other options to even buy this house? I've heard of the 203k loan, but can that be used to PURCHASE the HUD home? Or do I have to BUY the home FIRST, and then get the 203k loan?

Any help you can provide is greatly appreciated!!

-Nathan

Brian Gibbons · Answer

Ever  wondered if you can buy a home and get someone else to pay your  mortgage? You could do just that with the right property, the right  mortgage, and the right renters.

The Multi-Unit Strategy

As housing prices have begun to stabilize in most parts of the  country and home sales are on the rise, it’s an indication that the  housing market is indeed in the “thaw” stage and on the road to  recovery.

Likewise, demand for rental property is on the rise. Housing demand has also allowed landlords to demand higher rents.

The combination of low rates and higher available rent means it’s  possible that part or all of your mortgage payment can be paid for by a  renter. How can this happen? Purchase a multi-unit property, such as a  duplex or 3- or 4-unit property. You live in one of the units, and rent  out the others.

The Duplex, Triplex, or Fourplex Property

The right property for such an arrangement essentially means how many  units are attached to yours. With a duplex, the owner lives on one side  and the tenant on the other.  A 2-4 unit property, sometimes referred  to as a “triplex” or “fourplex,” has two or three available units to  rent out.

This is different than having a spare room, or a basement with a  kitchenette. A true 2-4 unit property contains legally separate units.  County records should show that the property is a multi-unit.

Each unit should have a separate entrance, kitchen, bathrooms, and  utility meters. As a rule of thumb, each unit should have the same  amenities as a standard single family home.

Some large single family homes have been converted into multi-unit  properties, especially in high-density urban areas. This is fine, as  long as the property is legally converted, and the changes are on file  with the county or local jurisdiction.

Here’s an example of the economic advantage of a 2-4 unit property.  If you charge each tenant $1,500 per month for rent, then living in a  fourplex will provide you $4,500 per month in rental income ($1,500 per  month times the 3 units you rent out).

It’s also possible to buy a multi-unit property as an investment, or  rental, property. However, these will be more difficult to finance, as  FHA and VA mortgages will not be available. You will be restricted to a  conventional mortgage with a high down payment, not to mention a higher  interest rate.

Properties with more than four units are considered commercial  properties and do not qualify for conventional or government-backed  financing such as FHA or VA loans.

How to Finance a 2-4 Unit Property

Your next step is to identify the proper financing for your property.  FHA and VA loans are government-backed loans and are issued for  owner-occupants only. These loans are available for 2-, 3-, or 4-unit  properties. As long as you live in one of the units, the home is  considered owner-occupied.

Down payment requirements, debt ratios, credit scores and interest  rate adjustments will vary based upon the type of loan you choose, but  any loan program in the market today will work as long as you qualify  for the loan and occupy one of the units.

The first consideration regarding the mortgage is determining the  cash flow. The lower your monthly payment and the higher rent, the  better your cash flow will be.

Say that you buy a duplex for $300,000 and put 20 percent down for a  loan amount of $240,000. If available rates were 3.75 percent (4.01  APR), your principal and interest payment works out to $1,111. But don’t  forget to include your monthly insurance and property tax payments when  figuring cash flow.  If your annual property tax bill is $3,000 and  your homeowner’s insurance premium is $1500, your monthly payments are  $250 and $125 respectively.

Your all-inclusive monthly payment is $1,486. If your tenant pays you  $1,500, you not only get your mortgage paid for, but you make an  additional $14 per month.

Now consider a four-unit property for sale that is listed for  $750,000. Again, with a 20 percent down payment the loan amount is  $600,000 and under the very same terms as above, the principal and  interest payment is $2,778. If monthly property tax and insurance  payments are $750, the total payment is $3,528.

Divide three tenants into $3,528 and the result is $1,176 per tenant.  As long as you charge more rent than your total housing payment, you’ll  enjoy the benefits of positive cash flow.

Keep in mind that your renter or renters do not need to pay your  entire mortgage payment to make this strategy make sense. Even if your  monthly payment is $2,000, and you collect $1000 in rent, your payment  is drastically reduced. In addition, your renter is helping you build  equity faster than you could on your own.

Down Payment Concerns

Don’t have a 20% down payment? Look into an FHA loan, which requires  only 3.5% down and offers increased lending limits for 2-4 unit  properties. For example, in Riverside County, California, a loan of up  to $961,550 can be had for a 4-unit property.

If you are VA eligible and live in a high-cost area as designated by VA, you may qualify for a zero-down loan of up to $1,094,625 in some areas.

Some conventional loans may allow a down payment of 10-15% in combination with private mortgage insurance.  Conventional loan limits are increased for multi-unit properties, so  you may qualify for a loan higher than the $417,000 limit set by Fannie  Mae and Freddie Mac for single family homes. Check with a qualified lender to discover your options for a 2-4 unit property.

How Much Rent do I Charge?

So, how do you determine how much rent your tenants will owe you each  month? The easiest way is to do a quick search on a website that shows  rental listings. See what landlords are charging for similar properties.

Speaking of rental income, can you use the proposed rental income  from the property you are buying to help you qualify for the mortgage?  Yes, this is possible. If you have landlord experience, your chances of  using the future rental income is better.  However, some loan types  allow you to use the income to qualify even if you have no landlord  experience.

Ask a mortgage professional if you can use this type of income.

Being a Landlord

Finally, is there a downside? Maybe. If you don’t like the prospect  of collecting rent each month from your tenants, sharing walls with  neighbors and fixing garbage disposals or replacing a hot water heater  at odd hours, being a landlord may not be for you.

When you’re a landlord you’re required to keep the property in good  shape for your tenants and be there when things need fixing. If this  doesn’t sound like fun to you, property management services can perform  all your landlord duties for a monthly fee.

And, there’s always a risk that you won’t be able to find renters for  your spare units. Make sure you have adequate cash reserves to make the  mortgage payment in this scenario.

Whether you have enough rental income to pay your entire mortgage  payment, or to just help out, living in a multi-unit home could be a  great strategy. Owning a 2-4 unit property could be a fantastic way to  get someone else to help you pay for your home.

- See more at: http://mymortgageinsider.com/multi-unit-properties/#sthash.4z1Tr8Pn.dpuf

Ted Schmidt · Answer

@Brian Gibbons Great analysis and recommendations as always!

@Nathan Samuelson If you buy a property and occupy it, you are under no obligation to remain in the house until its sold regardless of the loan type FHA/VA 203K or conventional.

The way I like to structure 50/50 deals is this:

• determine what you are splitting
• agree to make each partner whole
• split the profit 50:50

Lets say you find a house worth $100,000 and get a contract to buy it for $60,000.  You don't have the $60,000 so you get a partner.  The partner uses his money to buy the house.  Later, the partnership sells the house for $100,000 resulting in a $40,000 profit.  The partner that put up the money gets his $60,000 back and the partners each get $20,000 - 50% of the profit.

Michael Jobe · Answer

@Nathan Samuelson As I understand it with the whole owner-occupied requirement of the FHA loans, they actually have someone (maybe the lender?) come check to make sure the rules are being followed. Definitely not worth the risk to you!

@Matthew Marksbury Are those loans good for anywhere in the country or just specific regions? I'm looking for financing in North Carolina.

Eric Dufault · Answer

@Nathan Samuelson , I think you misunderstood what I was saying about the VA loan, there are actually extremely stringent and not open to the idea of a fixer upper.  I was suggesting the VA loan as an answer to not having a lot of money down.  Sorry for the confusion.

Matthew Marksbury · Answer

The loans are interest only at around 12%apr, which would make your payment on a $55,000 loan around $550.  My fee is minimal, around 1.5 points at closing and lenders is a few points as well but not that bad. There is no penalty for paying off loan early either. with most lenders.

Nathan Samuelson · Answer

@Brian Gibbons Great information, thank you. I never really thought of starting out with a 2-4 unit property, but I may start looking into it. I am definitely not turned away from landlord responsibilities. It's kind of cool too, because in just a matter of 5 days of looking, I've already built my buyers / renters list to over 50 people in my area, so I know there is a lot of interest! I'd have to figure out the math of everything of course, but it seems like it'd be a good option if done properly. Thank you again for the info.

Matthew Marksbury · Answer

They are available in almost every state, North Carolina is a state I can get you financing in.

Nathan Samuelson · Answer

@Wayne Brooks  - Thank you for the advice. I definitely want to do this the right way and not wind up in jail or anything remotely close to that.

@Eric Dufault  - Thank you for the link! Has a lot of great info on there. Really appreciate it. I wasn't aware that I could use my VA loan on a "Fixer Upper" home. Looks like I'll be scheduling an appointment with the VA and look more into this.

@Matthew Marksbury - Sorry, not sure if you got the reply I typed in regards to your post.

Kind of off topic, but since I know people are looking here I figured I'd ask. So I might be looking at going into the RE business with a friend of mine, where we'd be splitting everything 50/50...I'm not really sure how that'd work. Does anyone have any business advice on how to go about doing this with a business partner? Or know of a thread that might already be started with this info? At first thought, it seems like it'd be less helpful to have a business partner in this type of market...

Thanks again for the replies!

Eric Dufault · Answer

@Nathan Samuelson

here is a link with a lot of the details involving 203k loans as well as 203k streamline loans.

http://203kcontractors.com/faqs#max_loan_amount

I am looking into doing something similar but you are supposed to be the owner occupant for these type of loans., These loans only require a 3% down payment.  I'd also look into a VA loan through USAA where you can actually deduct points to lower your down payment to virtually nothing by increasing the APR, if you are looking to sell the property quickly the interest rate won't really matter.  Thanks for your service.

Wayne Brooks · Answer

Don't do it, it's loan fraud, and they do check.  You can generally only have one FHA at at a time, and 2 years in between loans.