Have equity in home count as part of down payment?

Question

Appraisal= $258k/ purchase price = $230k/ Built-in Equity= $28,000/ Down payment cash $27,000.

I have $27,000 cash to put into a down payment on the above home BUT, I need to use some (about $10,000) for a new roof/gutters.  Is there a way I can get a mortgage that will not have PMI due to the level of equity in the home and I can put down only $17-18k instead of the full $27k? Or do you have any other advice on how to pull this off? (Not interested in 203k loan due to difficulty level/finding broker to help).

If it is worth anything the home may appraise for slightly more now as it has a brand new furnace/HVAC and white 6ft perimeter vinyl fence since the last appraisal in April 2019.

I will also be in need of a rapid rescore after paying off large credit card balances.

Any NC mortgage folks that know how to pull this off?

Don Konipol · Answer

@Jessica Tucker Grubbs

Conventional and institutional lenders use the lower of purchase price or appraisal.  In

Years past this let to a “manipulation” of the numbers appearing on the settlement statement to accomplish the same end your trying to accomplish.  A number of highly publicized convictions and resulting prison sentences for mortgage fraud greatly reduced this methodology.

A private lender may take your “automatic” equity into consideration , but you’ll pay A LOT higher interest rate.

Chris Mason · Answer

The short answer is not at the point of purchase, no.

In six months when/if a new appraisal reveals a bunch of equity, at that point it can be put to work to get you a better deal on the financing.

Someone at 80% LTV on a rate/term refinance gets the same deal as someone putting 20% down when they purchase.

Zack Karp · Answer

@Jessica Tucker Grubbs everyone is making this way harder than it needs to be.

Can you buy the property from your dad with only 17K down?  Yes.  You may be able to put as little as 3% down using Conventional financing.

Is there any way to do this without PMI?  No.  PMI is required if you have less than 20% down.

However...

There are other PMI options besides the traditional monthly payment.  There is something called LPMI (lender paid), or single premium MI (lump sum).  Basically, instead of paying the PMI monthly like most people know, you can pay in a one-time lump sum, or you can have the lender pay it for you in exchange for a slightly higher interest rate.  These are options that your loan officer should be discussing with you anyway.

Hope that helps!  Best of luck :)

Andrew Postell · Answer

@Jessica Tucker Grubbs Ohhhhhhh!  If it's your primary home that changes everything!  So the answer is yes, you can purchase with a low downpayment AND yes, you can get rid of the "PMI" right away.  But this doesn't apply to ALL loans that you may qualify for so the guidance here is to get prequalified right away and speak to your loan officer to make sure they know the difference and know how to communicate to you what you need to do if you can only qualify for one of these loans.  Here's what you need to know:

FHA "renovation" loan (203K) - this loan type will have a 3.5% downpayment minimum.  Make sure that if you can only go this route that you work with a lender that offers both the "streamline" and the "full" version of this loan.  However, you will NOT be able to get around the PMI on this loan.  It will last a LOOONG time....beyond the 20% downpaymen threshold.  Get full information if you have to go this route.

Fannie Mae 'renovation' loan (HomeStyle) - this loan type will have a 5% downpayment minimum BUT you can "prepay" your own PMI and at a pretty big discount.  Meaning, PMI is still a requirement, but rather than paying it as a monthly amount you can pay it in a lump sum.  Usually at a 60% discount for prepaying it in this fashion.

*WHEW*  Lot's to know for sure.  So please do get with a lender or two and interview them so you can know your options.  Hope this helps!

Andrew Postell · Answer

@Jessica Tucker Grubbs you've had some good responses already but I wanted to add a couple of things here.  The BRRRR method is designed for this type of a scenario.  However, you would likely take a pass on this property since the numbers don't work in your favor.  Meaning, that most "acquisition" types of loans will be limited to 70%-80% of the ARV.  80% = $206,400.  Right there, that would be enough for most investors to take a pass on a property.  Your purchase price of $230,000 + $10,000 for repairs = $240,000 for a home that is worth $258,000.  That means you purchased the property at 93% of the value...and after I place your closing costs....I bet you would be right at 95%.  You must have MORE built in equity into your property.  At least, that's what most SUCCESSFUL investors would preach.  20% equity at a minimum.  Otherwise your cash will run out. Now if you do target properties with 20% equity that means less properties...but that's kind of the point.  The investors that survived the housing crises had built in equity.  The ones that didn't went bankrupt.  It's not easy finding properties with a good equity position but that's a really important step in all of this.  I hope all of this makes sense.

Jessica Tucker Grubbs · Answer

Thanks @Andrew Postell! Ultimately I decided to just go with a more conventional mortgage.  It is surprisingly hard to find lenders and contractors in my area to service my need for a reno loan.  Luckily I do not need much work done other than a new roof which can be handled in an alternative way.  Just such a bummer that they make it so hard to find and work through a renovation loan.  (I am sure they are out there, but I am running out of time to get the mortgage so I had limited time to research very heavily). Thanks again!

Jessica Tucker Grubbs · Answer

Thanks, @Zack Karp for your response.  I think that I will probably just deal with the monthly PMI and let it fall off when appropriate.  I hadn't heard of LPMI, so that was cool to learn about, not something I would want, but cool to know that it is out there.

Jessica Tucker Grubbs · Answer

Thanks @Andrew Postell, this thread is actually about my personal house that I will be living in for a fair while so just conventional loan.  It also was really more of an emotional/family consideration purchase than investment-minded.  Though I did try to buy low for what I got (GREAT new "trendy" location - and the general area market should appreciate well while we still own it).  It just happens that the roof is a little older, but I was willing to deal with that.

But I appreciate the solid advice, because nonetheless, I am new to real estate investing (just started my LLC last month) - the goal was to BRRRR mobile home parks basically, but I am having a hell of a time finding any good buys - everything I am finding so far was already gobbled up by investors and now being offered at premium.  I have already invested in learning how to operate in that market, but now am considering doing something more conservative as a first-time move as I would really not like to borrow any more from my private lender (family) than I already have, which a MHP would require.  I was considering looking at a flip - but this competition is fierce and a bit discouraging to a newbie.  But I WILL NOT give up until I figure out how to successfully get my feet wet.  Is this something all investors face in the beginning...hard not to feel a bit silly :(?

Jessica Tucker Grubbs · Answer

Thanks for your comment @Don Konipol  I guess I was thinking since down+(value-purchase)>20% of the loan that this would allow for a no PMI scenario.  I don't know what I was thinking because it really needs to be down+(value-purchase)>20% of the value... jeez, need more coffee.

Jessica Tucker Grubbs · Answer

Thanks for the reply @Chris Mason I just want to make sure I understand correctly.  Even though I already know at the point of purchase the home value it 258k+ and I am buying it for 230k I can't leverage that until a refinance is done?  There is no way to skip to the "refinance" scenario?

If it helps here is the story.

In April my father bought the home in NC for $230k for me after I negotiated that price from the sellers (I didn't make them address any repairs).  We had an independent appraisal for $258k from a licensed appraiser (before we changed anything about the home). We moved from our house in AZ into this house and currently live there (have since then replace HVAC/Furnace and added the nice new fence) our house in AZ finally sold so now we have our equity out and he is letting us by it back from him at the same $230k he paid.

Have equity in home count as part of down payment?

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