Conventional loan for an under priced property?

Question

I have a question about conventional loan financing...

If there was a house on the market that was selling for $40k and is valued at $90k, how will the bank write up this deal? Will you still have to put a 20% down payment even if the value of the house is above 20% asking price? Or will the bank consider this 50k price difference as equity and not require the down payment?

Also, it would only make sense to purchase a house with hard money then roll into a conventional loan if the house is in need of renovation. The bank will loan you the ARV of the property with a 20% down payment? Or would you only ask the bank to finance what you need to repay the HML; the difference between the HML and ARV would be considered equity and thus eliminating the 20% down payment?

Lost on the conventional loan concept.

Thanks.

Andrew S. · Answer

Yes, once you have owned (seasoned) it for a certain period of time (6-12 months usually), and you have built equity (as assessed by the appraisal) you can then refinance based on the new appraisal and pull out the difference in cash

Andrew S. · Answer

If you buy the property for 40k then the lender will assume that is what it's really worth, so yes, the bank will use their normal terms based on that purchase price (assuming you can find a bank that will make loans that small in the first place).  Banks will lend based on the lower of purchase price and appraisal.

That said, once it's seasoned you may be able to refi for cash-out if the value has increased.

Kyle Gregg · Answer

@Andrew S.

The bank will only consider the actual value of the property during a refi? Hopefully appraising it higher than purchase price, then cashing out the difference...