funding rehab project

[Ronny Tiburcio]

I am reading the book on flipping houses and it mentions how difficult it can be to receive money for rehab on the house you are trying to get a loan for. If i were to go with traditional financing, how can i come up with money to rehab the home?

[Jerry Padilla]

@Ronny Tiburcio

@Mateusz Prawdzik

@Matt K.

An FHA 203k is a great way to go as a last resort in my opinion. As you know, you are required to live in the property for a year, and it will be the lowest down payment, but it also has the highest costs and fees with the mortgage insurance never going away. So if this is the only route that you can go, it is best to refinance as soon as you can to eliminate the high cost of mortgage insurance.

There are a few other products for investors that would work well too. They are the HomeStyle and The EZ-C Renovation loans. 

The homestyle loan only does SFR for an investor and the EZ-C will go up to 4 units for an investor.

Here is some more info on each of these products: 

HOMESTYLE RENOVATION: 

Product Overview

• Combines home purchase or refinance (limited cash out) with home improvement financing in one loan with one closing
• Provides a convenient way for borrowers to make renovations, repairs, or improvements totaling up to 50% of the "as-completed" appraised value of the property with a first mortgage, rather than a second mortgage, HELOC, or other more costly financing method.
• Funds can be used for repairs or renovations that are permanently affixed and add value to the property.
• Primary residences as well as second homes and investment properties are eligible.
• NO MOBILE/MANUFACTURED HOMES

Required LTV's:

Primary Homes:

-1-4 Units

-620 FICO Minimum (660 High Balance)

-95% LTV 1 Unit

-85% LTV 2 Unit

-75% LTV 3-4 Unit

- Minimum 680 Credit score

Second Homes

-1 Unit - 90% LTV

-700 FICO Minimum

Investment Properties:

-1 Unit - 85% LTV Purchase Only (75% LTV Limited Cash Out)

- 720 FICO Minimum

-2-4 Unit Investment Properties - NOT ALLOWED WITH THIS PRODUCT!

Allowable Repairs or Renovations

• Funds can be used for any repairs or renovations that are permanently affixed and add value to the property.
• Allowable repairs or renovations include, but are not limited to:
  • Installation of an “in-ground” swimming pool
    • Outdoor living areas are also eligible along with the pool installation
  • Subject property cannot be an unfinished model home or unfinished new construction.
  • Kitchen appliances (i.e. cooktop/ovens/stove/refrigerator/dishwasher) may be included only as built-in fixtures (attached to property - cannot be removed) in connection with a total kitchen renovation that includes new cabinetry and countertops. Eligibility will be determined by the Renovation Department on a case-by-case basis. Washers and dryers are not included - no exceptions.

-Properties requiring foundation or structural repairs require a foundation or structural report from a licensed engineer. Some examples include but are not limited to additional square footage being added, garage additions with new foundations, cracks or settlement.

Renovation Cost Limits

• The cost of renovations is limited to 50% of the “as-completed value” of the property*.
  • No exceptions. This is a Fannie Mae requirement. These limits include the 10% contingency reserve IF FINANCED and all fees/costs listed below in the Fees section. Note: If the cost of renovations exceeds the maximum, the Borrower is NOT allowed to pay the difference at closing from their own funds. However, Contingency funds CAN be paid out of pocket. Any borrower funded contingency that is not used to complete the project will be refunded back to the borrower.
• Projects that include Structural Repairs or Adding Square Footage MUST have a Structural Engineers Report.
  • If an Engineer's Report is not economical in your area, a Feasibility Study can be ordered from Trinity Real Estate Solutions:

The EZ-C RENOVATION LOAN:

Product Overview

• To be used on Conventional loans for either required or optional repairs.
• Repairs MUST be permanently attached to the property and add value.

NO MOBILE/MANUFACTURED HOMES

Primary Homes

-1-4 Units

-620 FICO Minimum (660 High Balance)

-95% LTV 1 Unit

-80% LTV 2 Unit

-75% LTV 3-4 Unit

Second Homes and Investment Properties

-620 FICO Minimum (660 High Balance on Second Home only)

-1 Unit - 80% LTV Purchase Only (75% LTV Refinance)

-2-4 Unit Investment Properties now eligible (75% LTV purchase/refinance). Standard Conforming Loan amounts only, NO High Balance.

Allowable Repairs or Renovations

• Repairs/improvements must be permanently attached to property and add value
• Cosmetic repairs only
  • "Built-in" kitchen appliances

Conversions:

-Conversion of 2-unit to 1-units

-Conversion of 1-unit to 2-unit by exception only. Borrower must have prior landlord experience or qualify without rental income

Renovation Cost Limits

• Up to $35,000 in repairs/improvements
  • This includes the 10% contingency reserve
  • Loan amount calculation is Sales Price + Bid + Contingency Reserve ONLY
    • Renovation fees CANNOT be rolled into the loan amount unless it is a REFINANCE and LTV permits.

Note: If cost of renovations exceeds 35k, the Borrower/Seller is NOT allowed to pay the difference at closing from their own funds. If maximum amount is exceeded use HomeStyle Renovation program.

Contingency Reserve

A contingency reserve equal to 10% of the total costs of the repairs/improvements must be established and funded for all mortgages to cover required unforeseen repairs or deficiencies that are discovered during the renovation.

Contractor Validation

• Contractor is selected by the borrower and approved by the lender
• Contractor validation will be completed by the Renovation Department
• Maximum of three (3) contractors
• General Contractor is preferred but not required
• Follow state and local requirements for licensing of contractor(s). If a general contractor is not licensed for work that requires a license (i.e. plumbing, electrical, HVAC, etc.) obtain:
• proof of the general contractor's liability insurance coverage of at least 2 times the total bid, OR
• the license of the sub-contractor completing the work.
• “Do-It-Yourself” Projects are NOT acceptable even if the Borrower is a licensed contractor.
• Contractor on the project CANNOT be one of the following. (NO EXCEPTIONS):
  • Borrower
  • Borrower's employer
  • Members of Borrower's family
  • Seller
  • Realtor involved in transaction
  • Loan Officer involved in transaction