Getting creative with FHA + seller financing?

6 Replies

I've found a 2-family property in Bushwick, Brooklyn where the seller is willing to carry some financing (he has a $400k mortgage to pay off). He is asking $850k for the house, and it probably needs $150k in renovation to make it nice. I already have a commitment letter for up to 800k financing with FHA. My question is, is there any creative way that I can combine my FHA loan plus the seller financing to make this deal work? Total cost is probably a bit over $1mm. I'm not asking if people think it's a good deal, just wondering how, if at all I could structure the financing to make it work. Thanks.

@Chris Mason actually I am already pre approved for a 203k. But I still am not sure how that helps me. I'm capped at borrowing 800k from the bank, and I'm not sure how the bank would feel about me taking a second mortgage from the seller for the additional 200,000 or so that I'd need for the renovation. Care to expand on your line of thinking?

Originally posted by @Eric A. :

@Chris M. actually I am already pre approved for a 203k. But I still am not sure how that helps me. I'm capped at borrowing 800k from the bank, and I'm not sure how the bank would feel about me taking a second mortgage from the seller for the additional 200,000 or so that I'd need for the renovation. Care to expand on your line of thinking?

 Got it, now I see the full picture. 

I checked with a 203k Wizard in my office that does some truly amazing things with 203k, and she is confident that she could put that together. Alas she is not licensed in NYC so that isn't help for you, but if she says it can be done then it can be done. If your 203k person says "no," find another.

The bullet points from her were that the $200k 2nd mortgage needs to be disclosed and have a 'note' that will work for HUD, and you need to qualify including that as a monthly debt obligation in your DTI.

Your contractor will put together a bid that includes funds from BOTH the 203k and the $200k, and the home can be appraised based on after-improved value. The first mortgage lender will likely want to verify arrival of the $200k in escrow prior to funding the first.

Originally posted by @Wayne Brooks :

@Chris M.

Really?  I'll be damned, wrong again!

It only works because it's 203k, so appraisal is based on post-improved value. Max LTV is still 96.5% however.

So the appraiser is going to look at ~$800k covering both purchase and half the reno, and then ANOTHER $200k of work for the second half of the reno, and conclude that the home will be worth (suppose) $1.3m at the end of it.

Total liens are about $1m, home worth $1.3m, about 76% CLTV. Most FHA is 96.5% CLTV (98.18% if UFMIP is financed), so this would actually be MORE conservative than most FHA loans.

And incidentally we're hypothetically pretty close to the equity position desired for an owner occupied rate/term refinance that'll pay off both the FHA loan, the private note, and remove PMI.

Wish I could do deals in NY, I'd team up with our 203k Wizard and this one would be a lot of fun to do!