Raleigh, NC · Member since 2019 · 62 posts · 30 votes
My grandpa offered to be my private money lender if I were to find a good wholesale deal. I live in the Raleigh NC area and it seems to be a rehabbers market. Nothing on the MLS fulfills the 1% rule, but I think it's possible if I find something off market.
Would it be possible to rehab something and refinance to a FHA loan, or would it have to be refinanced to a conventional loan?
@Nathaniel J Mott that’s a good question and I’m not sure if it can be done, but if you break down the principals you can help decide if the idea is a good one or makes sense.
If you buy off market and you goal is to rehab the property, you will most likely be buying it at less then the ARV (after repair value).
For example, you buy a home off market for 150k and after putting 20k into it to fix it up it’s worth 200k. You already built 30k of equity into it.
When you refinance, banks usually want 20% of equity left in the deal. This is why I'm thinking FHA loan wouldn't work. As the only time you would really want to do an FHA loan would be if you only had enough money to put 3.5% down. Because when you put less than 20% down you have to pay MIP (mortgage insurance premium).
With the deal I mentioned above, the bank would determine the house is worth 200k, refinance at 80%, leaving 20% in the deal. This would give you 160k. You could pay your grandpa 150k and the 10k would be yours to pay for half of the rehab. Obviously there are ways to make the deal even better and get all your rehab money out during the refinance.
In conclusion, an FHA loan is a great tool in certain circumstances, but when you are adding value to a property and building in equity I don't think it makes sense to use.
Hello @Jonathan Steiger, what do you want to do with the deal? One important thing to consider if you use a FHA loan is that you must live in the property. There is a great Guide here in BP about Home Loans that you can learn more about.
@Jonathan Steiger Thanks that makes sense! I have some of my own funds for the rehab, but am still interested in how I could pull out more rehab money from the refinance in that hypothetical scenario.
@Carlos Paz I would be living in the property. I'd like to house hack, maybe live in a trailer outside the house and rent the whole place out.
I'm not sure if buying an off-market deal is smart for a first time home owner but it doesn't seem like there are many good investment properties on the MLS in Raleigh.