Flexible financing options?
Member since 2021 · 2 posts · 1 vote
Hey everybody, I'm wondering if there is any conventional mortgages that will lend on a property that needs work? I'm able to do 20% down no problem but don't want to be under the pressure of a hard money loan and other similar products, I'm planning on doing the work myself and would probably use a line of credit for materials, and pay myself back with a refi after completion. Any advice on financing that would match what I'm looking for would be greatly appreciated.
Listed below are examples using each type of loan where you can wrap renovations into financing (VA, FHA, Conventional, USDA)
VA Renovation Loans: Eligible for a 0% down Purchase price. Although highly underutilized by the veteran community, a solid option to get into RE Investing as a veteran/active duty is to use the VA Renovation Loan. Identify a property that needs work on the MLS and purchase as a primary residence (which enables the best possible financing terms) - move in & make repairs (that can be financed into the loan). The VA Renovation loan requires you hire contractors to perform work on the house that you must coordinate. You must essentially be the quarterback for the whole operation and it allows you to manage the entire process. The lender will push you to deliver results based on timelines as set forth by the guidelines. You gain a ton of experience while also having a safety net of other parties interested in the completion and success of the purchase/renovation. This loan is acceptable for a multifamily purchase as well, up to 4 units.
FHA Renovation Loans: FHA offers 2 types of Renovation Loans that fall under its 203(k) product: Standard and Limited. The main difference is that Limited = repairs less than $35k. Standard = Repairs greater than $35k. Standard 203(k) requires a HUD inspector to sign off on the repairs, a Limited 203(k) does not. Like the VA Renovation, you will quarterback the entire renovation process and you will have other parties pushing you along to meet deadlines. The repairs can be financed into the loan. Additionally, you must live in the property as a primary residence - which enables the best possible financing terms. The only downside to this is the $10k the investor has to put into the deal. FHA loans require 3.5% down, in addition to closing costs. I'd recommend a gift from a family member or friend to assist in this.
Conventional Renovation Loans: The conventional channel also offers a Renovation product with guidelines from both Fannie Mae and Freddie Mac, where the repairs can be financed into the loan. These are called HomeStyle, HomeStyle Limited, CHOICERenovation, and CHOICERenovation Limited. Both Limited options have a $25k Max on repairs, while the standard versions have no max renovation budget ($50k for manufactured homes). If the investor is a First Time Home Buyer (FTHB), they can utilize the 3% down conventional version of this product.
USDA Renovation Loans: Much like the VA, USDA is a 0% down loan. This too, has a renovation product but the structure of it is still in the works with a couple lenders. The repairs can be financed into the loan. The best thing about the USDA loan is that it's open to everyone and you don't have to be a veteran or have a down payment. This loan type, however is very specific about income, property type, and property location however. Each county in the US has a max allowable income limit, which can be found HERE. The property type must meet the requirements of the guidelines, as well as the allowable locations in the US, located on this map: https://eligibility.sc.egov.us...
Have you looked into the various FHA 203 K loans? It would require that you live in the property as your primary residence for a year if that's an option for you, but also would save you the 20% down as you could be able to get in at 3.5%
It does create some hoops to jump through, but that would give you the option to wrap in the rehab costs with your loan. Food for thought. I live in the eastern pandhandle, starting my research into Huntington.
Listed below are examples using each type of loan where you can wrap renovations into financing (VA, FHA, Conventional, USDA)
VA Renovation Loans: Eligible for a 0% down Purchase price. Although highly underutilized by the veteran community, a solid option to get into RE Investing as a veteran/active duty is to use the VA Renovation Loan. Identify a property that needs work on the MLS and purchase as a primary residence (which enables the best possible financing terms) - move in & make repairs (that can be financed into the loan). The VA Renovation loan requires you hire contractors to perform work on the house that you must coordinate. You must essentially be the quarterback for the whole operation and it allows you to manage the entire process. The lender will push you to deliver results based on timelines as set forth by the guidelines. You gain a ton of experience while also having a safety net of other parties interested in the completion and success of the purchase/renovation. This loan is acceptable for a multifamily purchase as well, up to 4 units.
FHA Renovation Loans: FHA offers 2 types of Renovation Loans that fall under its 203(k) product: Standard and Limited. The main difference is that Limited = repairs less than $35k. Standard = Repairs greater than $35k. Standard 203(k) requires a HUD inspector to sign off on the repairs, a Limited 203(k) does not. Like the VA Renovation, you will quarterback the entire renovation process and you will have other parties pushing you along to meet deadlines. The repairs can be financed into the loan. Additionally, you must live in the property as a primary residence - which enables the best possible financing terms. The only downside to this is the $10k the investor has to put into the deal. FHA loans require 3.5% down, in addition to closing costs. I'd recommend a gift from a family member or friend to assist in this.
Conventional Renovation Loans: The conventional channel also offers a Renovation product with guidelines from both Fannie Mae and Freddie Mac, where the repairs can be financed into the loan. These are called HomeStyle, HomeStyle Limited, CHOICERenovation, and CHOICERenovation Limited. Both Limited options have a $25k Max on repairs, while the standard versions have no max renovation budget ($50k for manufactured homes). If the investor is a First Time Home Buyer (FTHB), they can utilize the 3% down conventional version of this product.
USDA Renovation Loans: Much like the VA, USDA is a 0% down loan. This too, has a renovation product but the structure of it is still in the works with a couple lenders. The repairs can be financed into the loan. The best thing about the USDA loan is that it's open to everyone and you don't have to be a veteran or have a down payment. This loan type, however is very specific about income, property type, and property location however. Each county in the US has a max allowable income limit, which can be found HERE. The property type must meet the requirements of the guidelines, as well as the allowable locations in the US, located on this map: https://eligibility.sc.egov.us...
Hey everybody, I'm wondering if there is any conventional mortgages that will lend on a property that needs work? I'm able to do 20% down no problem but don't want to be under the pressure of a hard money loan and other similar products, I'm planning on doing the work myself and would probably use a line of credit for materials, and pay myself back with a refi after completion. Any advice on financing that would match what I'm looking for would be greatly appreciated.
I’d suggest a conventional renovation mortgage such as HomeStyle or Choice Renovation (Fannie/Freddie’s reno loan product). If you’d like I’d be happy to connect you with a lender licensed in your area.
Thanks for the replies everyone. Will definitely look further into home style and choice reno limited. Do these products allow you to purchase materials or do they require contractors? Also will they purchase big ticket items such as furnace/ac/water heater if the applicant is licensed to purchase and install these items?
Thanks for the replies everyone. Will definitely look further into home style and choice reno limited. Do these products allow you to purchase materials or do they require contractors? Also will they purchase big ticket items such as furnace/ac/water heater if the applicant is licensed to purchase and install these items?
Hi @Mike Bartell, there is a DIY option for these loans. Below is the guideline straight from Fannie Mae.
The “Do It Yourself” option is available for renovations made to one-unit properties by the borrower. This option is not available for manufactured homes. “Do It Yourself” renovations may not represent more than 10% of the “as-completed” value of the property. The lender must review and approve the renovations in advance, and must inspect the completion of all items that cost more than $5,000.
A borrower may request reimbursement for his or her payments for the cost of materials or for the cost of properly documented contract labor, but not for the cost of his or her sweat equity (labor). When a borrower chooses this option, the lender must fully budget for the cost of labor and materials related to the renovation so that, should the borrower be unable to complete the work, a contractor can be hired to finish any of the “Do It Yourself” repairs.
Hope this helps!