All Forum Posts by: Perry Farella

Both HomeStyle and Choice do allow a minimum 15% down payment for an investor buying a single family or condo. This 15% is off the sum of purchase price and rehab dollars plus a required 10% contingency reserve for unexpected costs. All based on an appraisal report showing both after renovated value and after renovated expected rental income. Then they give you 75% of the gross expected rented income as extra income to qualify. Not a bad deal because there is lender oversight and the ARV appraisal is used to approve the loan. So unlike all cash, where you may not bother to get an ARV appraisal with projected future rental income, you cant close on a deal that makes no sense, the lender will deny the loan if the numbers don't work. This is great for newbies but maybe for experienced fix/flippers would be seen as too burdensome, too many rules.

A VA loan can be great for a owner occupier. just be sure the house can meet minimum VA property standards ( no peeling paint anywhere, no broken windows, fully functional HVAC, water, electric, etc.). Best way is to ask Seller to pay Buyer closing costs in the initial offer contract for a truly zero cost purchase.

Say closing costs in your area are 4% of sale price on average, so offer high enough that with a 4% Seller credit back to pay all Buyer closing costs ( even the entire first year premium of home insurance, any buyer attorney fee, local taxes, local title charges, etc.) the net the Seller will leave with is enough to make them happy. This way it truly will be a 100%  zero cost purchase for you, no down payment paid and no closing costs paid. 

An example might be a house for sale at $100,000  that you would normally expect to pay 95,000 for.  Maybe offer 99,000  with 4000 back from seller to pay buyer closing costs so seller nets the 95,000 they may have agreed to anyway. 

The VA made a rule this year though that a 100% financed VA buyer cannot walk away with cash from any seller tax prorations ( money given to a buyer to pay future property tax bills that really are sellers responsibility). So you cannot walk away with cash any more on a VA deal where seller is paying all closing costs as you could last year. You can get a check back at closing for the earnest money you may give to a seller at offer time but that's it. Anything else extra must go to Principal reduction of the loan size, not cash back to the VA buyer.

There was a VA renovation option where you could add into the VA loan dollars to renovate or repair. But due to Covid the VA is refusing any VA appraisal orders on this type of renovation loan, effectively killing it for the time being until the VA decides otherwise some day. They may feel the VA Appraiser would encounter a bunch of potentially Covid positive rehab workers on site which is not accurate since all rehab work could be done only after closing.

As an alternative there are conventional Investor rehab & purchase loans available based on 30 year amortization, personal credit scores. One is Choice renovation I have done for others. It is a loan for individuals, not LLCs if you can live with that and lender oversight. An example would be : purchase at 100,000 then add in 50,000 for rehab = 150,000 total; then minimum down payment is 15% of the 150,000 or 22,500 down. Then you have financed both the purchase and 100% of the rehab. The loan rate is based on credit score and down payment but today generally in the high fives but no pre-payment penalty so you can sell whenever. As a bonus the loan forecasts the future ARV as well as future rental income and gives borrowers 75% of gross rent as extra income to qualify beyond their own personal income. So its generally easy to qualify. The lender requires a GC or sub-contractors licensed in the trades, the borrower cannot do the work themselves basically. 10% of the rehab budget is released at Closing to get a quick start, the rest released in Draws as rehab progresses. 6 months is time frame to complete. A 10% emergency reserve is added off the base budget for any cost overruns or unexpected expenses after closing that occur but if never needed it is subtracted from final loan principal. So while not as easy as a hard money loan and with lender oversight, this may be an answer in this situation. My Blog has examples and Im happy to answer questions.

As an alternative there are investor rehab loans called HomeStyle and Choice from Fannie Mae and Freddie Mac. Down payment minimum 15% off sum of purchase price and rehab dollars, 30 year terms, low rates, no pre payment penalty, fix/flip or buy/hold/lease. An example would be buying a property for 100,000 and needing 50,00 for the rehab , so its a 150,000 transaction. 15% down is 22,500. Then the rehab is totally financed with the purchase and its a 30 year amortization so no pressure to pay back a HML. Now there are rules - no LLCs, only individuals so credit history matters, etc. The lender will want only a licensed GC or subs doing the work. But the ARV is projected by the lender's appraiser so you know if the numbers will work for you before the loan is even approved and can walk if it doesn't work. But as a bonus you can use 75% of projected future rent as extra income to qualify even if the plan is to never rent and flip. If you need help with closing costs its always permitted to have seller provide a 2% credit off purchase price to help pay buyers closing costs on an investment property. This is designed for novice investors. Those with many properties and cash on hand would not be the audience for this loan. But it can be a way forward. Stories in my Blog or ask questions any time.

Not to cloud this issue but what's key on 203k is a good HUD Consultant. Trying to do it as a Limited under 35k with no consultants puts you at risk of under estimates by dishonest contractors. Here is a link from my how2fundrenovation.com blog on the steps and roles of all the players that might be helpful. https://www.how2fundrenovation.com/fixer-upper/quick-overview-of-a-renovation-loan/ Happy to answer questions on successful 203ks anytime.

Just to add I didn't realize Hard money lenders don't like "upside down" projects. Speaking as a conventional lender we care only about ARV, not current value. That would the advantage to how our rehab loans are set up. My blog has a post comparing hard money to what we offer if you need more details. Happy to answer questions any time.

Another thought is a conventional investor rehab / purchase loan called HomeStyle or Choice Renovation. Here the down payment is 15% of total of purchase price + rehab dollars. Only restriction is rehab portion of the loan cannot be more than 75% of ARV. If the rehab is higher than the purchase price that is not an issue. It might mean you are getting a good deal. Example: Purchase 50K + rehab 60K + required 10% emergency reserve on rehab which is 6k in this case = 116,000 total transaction X 15% down of 17,400 leaves a 30 year mortgage for 98,600. The max rehab dollars are restricted to 75% of ARV. Say ARV is just 120k ( I hope it would be much more in real life) then max rehab dollars are 75% of 120k or 90k. That's fine since this rehab is 60k. If you don't mind lender oversight, using a licensed contractor then this loan may work for you. No pre payment penalty so fix/flip and pay off the loan or lease/rent and keep the loan for 30 years while the rent pays it off. rates are in the 5's today. The loan is only for individuals - no LLCS or corporations. So it is a loan in your name, based on your credit history etc. A bonus is that the future rent is automatically projected by an Appraiser and given to you as extra income to qualify at 75% of gross, even though you may not plan to rent when completed. So its fairly easy to qualify. You cant make a mistake basically since the lender will analyze the deal and if ARV does not support the rehab costs, the loan will be denied. Examples are in my Blog or ask questions any time.

As someone who , as a lender manages flip financing for small investors I would ask you to act just like a bank Underwriter would. Meaning if I were loaning someone 100k to fix/flip I sure would want to be as conservative as any bank might be. I have seen more flippers get into trouble than I have seen successful ones to be honest. I often deal with newbies so they tend to make these mistakes: 1- underestimate the time rehab will take, often due to weather delays or delays with local officials securing permits or delays with local building inspectors coming to inspect rough-ins thus delaying installing drywall and finishes 2- Over improving the properties by building them out as if it were to be their personal dream home, which means they go over budget and eat into any profits from selling plus cause more delays with changes 3- Over price the flip so it sits on the market too long and their carrying costs sky rocket which eats into any final profit 4- under estimate monthly carrying costs like water service charges and garbage collection charges- these will still be there even though water may not yet be turned on and the cost of electricity the contractor needs and will use monthly 5- get in trouble with the local building or planning dept. due to over building on a lot or tearing down so much of a house as to then have it viewed as a new build that doesn't meet todays lot line set back requirements and then have a stop work order issued for months while they argue that its not a new build which only increases carrying costs and decreases future flip profit or really causing the profit to become a loss The ones I see most successful are the first timers who buy a 3 or 4 unit to rehab and reside there for 12 months and do it on an FHA 203k loan to be honest. The majority of investor fix/flippers just don't have the discipline as above to keep out of trouble it seems. The HGTV shows like Good Bones I watched last night also have their issues and delays but they at least keep to their budget. If only life were like it is on TV...

Daniel, I do have experience with Conventional rehab loans so perhaps I can give you highlights of how they work. On a single family house you can buy and add in the rehab dollars needed, all with a minimum 15% down payment. Say you find a house for 50,000 and it needs 50,000 of rehab ( you know this because a contractor has given you a written proposal to rehab), then we add a 10% emergency Reserve to the 50,000 rehab of $5000 to cover unexpected costs found during rehab time after the loan has closed. So the transaction is 50,000 buy + 50,000 rehab + 10% or 5000 Reserve = 105,000 then a 15% down payment is 15,750 and mortgage is 89,250. That fully funds the rehab plus gives a 10% cushion and that cushion, if never used is subtracted from the loan balance at completion. There is no pre payment penalty so you can flip or hold & lease. You automatically get income credit for 75% of gross after renovated rent to help as extra income to qualify for the mortgage beyond just what your employment may pay you. We would appraise the property to its after renovated value ARV and have appraiser project after renovated rent as well. So you know all the numbers up front and if they don't work for you , you cancel the purchase. On a conventional investment mortgage you can always ask Seller to give you 2% of the sales price as a seller credit for buyer closing costs to help reduce your cash outlay if closing costs are a concern. My blog has examples of this loan called either HomeStyle or Choice Renovation. Happy to answer questions anytime.

Matthew, A FHA 203k on a 4 unit can be a nice low down payment option. I have helped clients do that many times. Here are the highlights: Down payment is total of purchase price + rehab dollars plus at least a 10% emergency reserve for unexpected costs later after closing. That reserve can grow to 15% or 20% if one of the utilities is not turned on and/or structural work is being done; you can finance up to 6 months of house payment into the loan as well if you wish given it may be months before renters can move in and you can move in so the 6 months of financed payments is a nice option; you will need at least a 680 middle credit score these days; a 3 or 4 unit will need to meet what's called the Self Suffiency Test- that is total of all projected future rents taken at 75% of gross must at least equal the total house payment, you can include the unit you will occupy to meet this test though. Example: Buy at 100,00 and add in 100,000 for rehab + 10% Reserve of 10,000 = 210,000 then 3.50% down payment is 7350.00 with mortgage of 202,650. (You will need to show after closing of at least 3 months or house payment reserves though which can be non liquid retirement funds or liquid cash ). Say rents from all 4 units are $1000 a month gross = $4000 taken at 75% = $3000 which means the total of principal/interest + annual property tax + annual home insurance + monthly FHA mortgage insurance cannot be more than $3000 so you have met the Self Suffiency Test. FHA monthly mortgage insurance is at a factor of .0085 X loan size divided by 12 months or if the loan in this case was for $202,650 X .0085 = 1722,52 / 12 = 143.54 monthly FHA mortgage insurance cost. I the plan is to refinance after some period once equity is at 20% then a Freddie MAC conventional 80% 3 or 4 unit mortgage will work and the mortgage insurance is removed saving at least 143.54 each month. You have to live there for 12 months and then can move out leasing all units to tenants but still keeping the FHA 203k if you wish as another option. My blog has stories of how clients have done this and even one post where I compared this to Hard Money Lenders. For a first time multi-unit buy and rehab this can be a great option. On the conventional side there is the Freddie Mac Choice Renovation 3or 4 unit buy & rehab loan that works alot like FHA 203k except you need 205 down of the total of purchase price + rehab dollars + 10% Reserve. But at least there is no mortgage insurance to pay. Happy to answer questions any time.