What can you use the home loan for, besides purchase ?

Question

Say the home you purchase is less than the amount you receive from the bank. Can you use the remaining funds for renovations?

David M. · Answer

@Sam Morgan

Oh I see.  Let me try to break this down for you a bit...  Why would a lender want to lend you money at low interest rates?  Oh, you have collateral?  Oh, if you don't pay your monthly payments the lender can take the real estate property away?  Oh okay, now the lender has some security just in case you can't pay back the loan...

Lets say you are purchasing a property for $100k and for sake of argument and mathematically simplicity the down payment is zero.  Assuming this is an arms-length transaction, the fair market value (FMV) of the property is $100k.  Why should a lender say lend you $110k?  The FMV is $100k.  If you start defaulting on the loan, the lender would never be able to get all their money back.  Even if for some reason the property appraised much higher, your sales price sets the fair market value.

Just for the sake of discussion, perhaps you've heard about people being able to take "cash out" loans where they are able to get cash in exchange for equity in their property.  Yes, that happens all the time.  However, that is normally on a re-finance where you basically get a new loan on a property you already own.  In general, you can't "cash out" and purchase a piece of real estate at the same time  --- this isn't like using a debit card at the supermarket and getting cash back.   Again, the loan can't be more than the value of the collateral.

I hope that helps.

Kyle J. · Answer

If you qualify for a larger amount, but end up buying a home for a lesser amount, you don’t get the difference (if that’s what you’re asking). The bank will just adjust their LTV off whatever the purchase price ends up being.

For example, let’s say you qualified to purchase a home up to $200k, but you end up deciding to purchase one that was only $160k. If the bank is requiring you to put down 20%, then you’ll need to come up with $32k in this example (20% of of $160k) and the bank will finance the remaining $128k (80%).

Make sense?

Paul Welden · Answer

There are many types of renovation mortgage loans that allow the borrower to increase the loan amount to cover the cost of rehab.

Oversimplified example: purchase price $150k + rehab costs $50k = $200k mortgage loan - $150k is used for purchase money and the $50k is used to pay contractors for the rehab.

Types of these rehab loans are:

• FHA 203k
• Fannie Mae Homestyle
• Freddie Mac ChoiceRenovation
• VA Renovation Loan

Paul Welden · Answer

@Xavier Williams I've had many of my clients (even recently) get some money back at closing, such as when the lender credits and/or seller concessions exceed what is needed. The borrower has gotten refunded the appraisal fee, inspection fee, earnest money deposit, etc., but never more money than what the borrower put in to the transaction.

Xavier Williams · Answer

@Paul WeldenMy apologies, I should have clarified. That’s correct any excess funds at closing whether from seller concessions or lender credit can be refunded up to the amount of any buyer pre-paids.What I meant was the borrower can’t do a “cash-out” type of transaction on top of the purchase price even if the value of the home is higher and there’s enough Equity to support the cash out like you would see in a “cash-out refinance” type situation.

Sometimes hard money loans will allow this if there’s enough meat on the ARV relative to the purchase price but I Wasn’t able to secure this even with a HML for a client recently due to the economic situation.

Xavier Williams · Answer

On a standard purchase loan, no excess funds are allowed back to borrower at close of escrow.

As mentioned above, some loan programs allow the cost of rehab to be financed and added to the loan. Even then, the funds are managed by escrow and a project manager who decides when to release funds to the GC as work is being completed.

Sam Morgan · Answer

@Kyle J.

Yes thank you!

Sam Morgan · Answer

@David M.

Yes hypothetically. I’m just trying gather more information. I’m new to this, so I didn’t know if the bank would loan you more than you need. If they run the numbers and say you qualify for more than you need to purchase.

David M. · Answer

@Sam Morgan

Is this a super hypothetical question?  Other than something like a 203k, why would a lender loan you more than the purchase price?  I guess my point is whatever “strings” that are attached to the funds is dependent upon the loan product.

What can you use the home loan for, besides purchase ?

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