All Forum Posts by: Perry Farella

HI, You would have to ask your lender if they offer any types of renovation loans. The Conventional ones, Freddie Max Choice and Fannie Mae HomeStyle will allow a 2 unit owner occupied property to be done with a 15% down payment based on purchase price + rehab dollars. Or the FHA 203k will also allow rehab dollars with a down payment as low as 3.50% if you qualify. Most lenders but not all, should use the existing 2nd unit lease at 75% of gross for extra income to qualify on either loan types. Happy to speak in more detail if you wish.

Christopher, Just to add an alternative you may not know is around, there are conventional buy and hold or fix/flip rehab purchase loans available for Investors. They require a minimum 15% down payment, based on total of purchase price + rehab dollars needed. No prepayment penalty, rates based on personal credit scores, these loan are not commercial and not done for LLCs, just done for individuals. One is called Freddie Mac Choice Renovation and other is Fannie Mae HomeStyle renovation. I have details on how they work for Investors in my blog and if you look there is blog comparing them to hard Money from a couple years ago. Always happy to answer questions. Example: Buy at 100,000 and add in 50,000 for rehab plus a required 10% emergency reserve off the rehab budget or 5000 in this example = 155,000 total transaction. Then minimum 15% down is 23,250. This fully funds the rehab/purchase and gives an extra 10% cushion if needed, if never used it is subtracted from final loan size at completion. An option that may work for some in the right circumstances, especially a buy & hold but fix & flip works too. You have the security of a low rate loan amortized for 30 years and can sell or rent as needed with no pressure from a Hard Money lender to repay quickly and no experience needed in rehabbing with the lenders oversight. Appraisal is done prior to loan approval to be sure all the numbers work and future rent is projected automatically and you get 75% of that monthly rent as extra income to qualify for the loan size needed.

Leonard, You didn't say how many units in this property ? Was it just 2 or is it 3 or 4 ? Is is a cash deal or will it be mortgaged ? I have helped first time rehabbers buy 2 to 4 units and add in rehab dollars is why I ask. You may not know yet about rehab mortgages but they exist. You can use a down payment as little as 3.50% of the total of the purchase price + rehab dollars, all in the same 30 year term loan. Rates are super low today, often 3% or less which includes the rehab dollars. Why do that ? To maximize rent now from all units and maximize after renovated value should you decide to sell sooner rather than later. It all depends on the numbers of course. A newly refreshed unit will almost always rent for more than one not updated. You only have to occupy the property for 12 months before you can rent out your owners unit and then the property is all tenants, while keeping the FHA loan if you wish. That's often the reason why buyers also do the rehab quickly at the front end before even moving in. Then the rehab is done, financed for 30 years at todays super low rates and you get to use the rehabbed property now, base rents off a rehabbed property and base value off the rehabbed property. My blog has detailed stories that may be helpful.

Just to add in my above comment, the Fannie Mae HomeStyle Investor Single family loan and the Freddie Mac Choice Renovation Investor loan for Single family will in fact allow as little as 15% down payment. That down payment is the sum of purchase price + rehab dollars. Example: If purchase price is 50,000 and you need 50,000 to rehab that is 100,000 total transaction, so minimum down payment is 15% or 15,000 in this example. That fully funds the rehab basically on a 30 year term loan with no pre-payment penalty so you can fix/flip if you wish. This is not a commercial loan which likely would mean a higher down payment. This is a small investor loan for those with 10 properties or less basically and made in the individuals name, not in the name of any LLC. Once you get to 2 or 3 or 4 unit buildings then its a different story as an Investor and down payment would go to 25%. I do have an investor rehab loan for those too but the rehab dollars are capped at just 35,000 on 2 to 4 unit buildings. The loan limits are based on Conforming loan limits by county. I hope that clears up any confusion I may have caused earlier. Examples are in my Blog.

Just to add some clarity here, the down payment is based on the number of apartments in a property. As an Investor you can buy a Single family home with 15% down and even add in rehab dollars if you wish. That has not changed with Covid. Two conventional loans, Fannie Mae HomeStyle or Freddie Mac Choice Renovation will allow an Investor to buy with as little as 15% down on a Single family. Once you go to 2 or 3 or 4 apartments, then as an Investor , down payment grows to 25%. The loan is to you personally, never to an LLC or corporation and based on personal credit score/history etc. My blog has example and happy to answer questions.

As an FHA 203k lender and a Conventional lender perhaps I can help here. On ANY FHA loan, 203k or otherwise, the owner / borrower does have to agree at closing to occupy the property as their primary residence for first 12 months before vacating and leasing all the units out. The advantage is the down payment can be as little as 3.50% down IF the numbers work. Separately the FHA has an extra rule for a 3 or 4 unit called Self Suffiency Test. Basically that means when counting future rents from ALL apartments, even the one the owner will occupy, that rent total, taken at 75% of gross MUST at least equal the full monthly mortgage payment. The lender who told you that you must occupy 50% of a Duplex likely just meant you will occupy one of the two apartments for 12 months, just like any FHA loan. The nice aspect of the 203k is you can add in needed dollars to repair or update, all based on the future After Renovated Value or ARV. Plus with 203k on a purchase, you can be mortgaged to 110% of that ARV. A huge advantage if the area is just starting to appreciate. Another plus is 203k allows you to add in up to 6 months of house payments during the construction period. This is so that you don't have to make mortgage payment while no units can be rented yet and you are paying to live elsewhere. Now A Conventional loan also allows rehab. The Freddie Mac one I really like called Choice renovation because it allows a 2 unit Owner Occupied (duplex) to be mortgaged to 85% of ARV, so you need 15% down. Then a 3 or 4 unit can mortgaged to 80% so you need a 20% down payment. (If the 2 to 4 is to be Investment property then down payment goes to 25%)This loan also requires you to reside there for first 12 months before turning into an all tenant property. My blog has examples of these and Im happy to answer questions.

Just to add that a conventional Owner Occupied renovation loan can be done with 5% down. But when done as Investment for fix/flip or lease/hold, the down payment rises to minimum 15% down but you get credit for future rent at 75% of gross rent, as projected by an Appraiser, to help qualify whether you sell or not. Just a word on 203k. Yes more paper work, yes you have to hire a HUD Consultant if over 35k in rehab and yes the lender investigates the contractor for you. This is of enormous value to a buyer. Would a buyer do a background check for any contractor typically ? or check for litigation the contractor was involved in ? Or check for unpaid tax liens ? Check for felony convictions ? If any of these are occurring, it is perhaps best to avoid this contractor ? I have seen horror stories. This oversight, while to those who are experienced flippers may be unappealing, to a first timer, these oversights can be life saving. Yes FHA charges a 1.75% fee called a Mortgage Insurance Premium or MIP at closing. However this fee can be added to the loan, rather than paid in cash as a closing cost. Yes it raises the monthly payment a bit but if after rehab the loan is refinanced, the borrower never really paid much of the MIP if you see what I mean. While not for everyone, a 203k can be used to advantage for a first timer. More stories in my Blog.

For a first time investor, the 203k is a great option vs. Hard Money. The reason why is there is up front checking on ARV by the lender, up front forecast of ARV rents and lender oversight in the form of the HUD 203k construction consultant. Yes HUD Consultant charges $500 to $1000 to prepare a Specification Of Repairs report. That report defines code violations that need to be fixed, what the buyer wants to do and then has a forecasted cost BEFORE the loan is ever approved, giving the buyer an off ramp should the numbers not work. Then HUD Consultant inspects Contractors work before authoring lender to release funds, by wire, direct to Contractor for speed. Checks were used years ago, not today. Yes the Contractor does need whatever local licenses by city or state, does need Liability insurance for Buyer protection and lender does a backgrounds check. It would be nice to learn if Contractor is a convicted felon or has litigation against him or tax liens where he might be tempted to use your money tp pay a tax lien behind your back ( I have seen it all). So yes a 203k takes time, we do them in 30 to 45 days. Rates are super low, borrower can also borrow up to 6 months of mortgage payment dollars in addition to rehab dollars, plus we always do at least a 10% emergency reserve of the base rehab budget, and sometime up to 20% if major work. All this protects the buyer is all I can tell you. I have helped many first time buyers purchase and rehab 2, 3 or 4 unit properties with 203k successfully. My blog has many stories you can read or ask me questions.

Just to add of you have a 15% down payment off sum of purchase price and rehab dollars, there is conventional way to finance a fix/flip still available today. But the loan is your name and your partners as an individual loan, no LLCs allowed. I have written a post that compares this approach to hard Money. Not for everyone but this is a potentially attractive alternative for the right situation. The post is here: https://perryfarella.com/2018/10/rehabbers-looking-for-alternatives-to-hard-money-lenders/ if you can paste it into your browser. Happy to answer questions any time.

The issue in Illinois is the High Cost Statute was never done with lower cost properties in mind . So we hit the limit with our title charges, etc. very quickly on a 50k purchase price. If this is to be a loan for you and not your LLC you can do the HomeStyle or Choice Renovation purchase & rehab loan with 15% down payment off the sum of purchase price and rehab dollars. To help get around the high cost statue write the contract such that Seller pays Buyer 2% of sale price for some of Buyer closing costs. That takes some of the funds out of the high cost statute calculation and switches them to Seller side costs. Of course you will have to make your offer more attractive to have a Seller do that. We have done that for our Investor clients successfully in Illinois. These loans work by allowing you to be mortgaged to 85% of ARV. Must have a licensed contractor doing the rehab with all local building permits required and accept some lender oversight. But they are 30 year fixed rate loans with fixed monthly costs should you decide to buy , rehab, hold and lease it for a while. No pre payment penalty so you can flip it whenever its ready. My blog has stories of how these loan work for small investors and even how they compare against Hard Money loans. Rates are based on personal credit score and these days in the five's mostly for a 30 year term. Happy to answer questions any time.