New to Real Estate · West Boylston, MA · Member since 2022 · 8 posts · 4 votes
Hi all,
Would I still need to provide a down payment on a mortgage if the loan is valued far below market value on the house in question? I have the opportunity to purchase a property for $160,000 through someone I know. The house is worth anywhere from 260-300k. I want to make this into a long term rental. Does anyone think I would have to provide a down payment to acquire a mortgage for this property at $160,000 for the loan request?
If the house is worth $260K, but you only need to get a mortgage for less because someone will sell it to you for $160K, that is fine. You will still need to come up with a down payment. Your purchase price is $160K and you will need to come up with 5-20% (5% if you are living in it and 20% if you plan on renting it out and not living in it). Assuming you want to rent it (as you said in your post), you will need $32K plus closing costs and you could get a mortgage for $128K (assuming your bank will lend it to you).
What some people will do is after 6 months, they will refinance the house. At that point, you can take out up to 75% of the house's value ($195K) which would allow you to pull out the equity. The down side of that are your mortgage payments go up and there are no guarantees. There are also fees associated with refinancing.
Most lenders will lend based on the lower of the purchase price or appraisal value. There are some options with local lenders if you have an ongoing relationship but it will take some work to get them there.
Most lenders will lend based on the lower of the purchase price or appraisal value. There are some options with local lenders if you have an ongoing relationship but it will take some work to get them there.
The house is worth around 260 and I want to take 160. Does this mean they wouldnt fund a loan on a house for under market value? I'm not following your answer, forgive me
If the house is worth $260K, but you only need to get a mortgage for less because someone will sell it to you for $160K, that is fine. You will still need to come up with a down payment. Your purchase price is $160K and you will need to come up with 5-20% (5% if you are living in it and 20% if you plan on renting it out and not living in it). Assuming you want to rent it (as you said in your post), you will need $32K plus closing costs and you could get a mortgage for $128K (assuming your bank will lend it to you).
What some people will do is after 6 months, they will refinance the house. At that point, you can take out up to 75% of the house's value ($195K) which would allow you to pull out the equity. The down side of that are your mortgage payments go up and there are no guarantees. There are also fees associated with refinancing.
Most lenders will lend based on the lower of the purchase price or appraisal value. There are some options with local lenders if you have an ongoing relationship but it will take some work to get them there.
The house is worth around 260 and I want to take 160. Does this mean they wouldnt fund a loan on a house for under market value? I'm not following your answer, forgive me
yes, even though the house may be worth more, most banks lend based on purchase price.
Yes. If you're buying the property for $160k, it's worth $160k...and you'll need a DP. Six months from now the property will be what lenders would call "seasoned", you can get an appraisal, and if the appraisal said the property was worth $260K, $160K, or $160M, that's what the property will be worth.
You would still need to do a downpayment on the $160,000. No lender will give you money without having some skin in the game unless its a hard money lender you have worked with for years.
On the bright side, if it is actually worth double, wait 3-6 months and do a cash out refinance to get back what you initially invested.
Would I still need to provide a down payment on a mortgage if the loan is valued far below market value on the house in question? I have the opportunity to purchase a property for $160,000 through someone I know. The house is worth anywhere from 260-300k. I want to make this into a long term rental. Does anyone think I would have to provide a down payment to acquire a mortgage for this property at $160,000 for the loan request?
Thanks all!
Chris, There are lenders who will lend based on the lesser of 80% LTV or 90% LTPP (loan to purchase price). In your case, you could refinance in whats called a "Delayed Purchase" loan, where seasoning is <6 -mos. This way you can at least benefit for a lower 'down payment', but of course still have to pay closing costs.
OR - the better outcome:
If you can show you've renovated it, even a small $7,500 - $10,000 budget, there are lenders who will cashout refinance the day you complete your rehab at the current/ARV without any seasoning, TBD based on new appraisal. The rule is "If its been rehabbed, use ARV for cashout refinance. If no rehabbed, it's delayed purchase".
In your example, If you bought it for $160,000, can show on paper you put say $10,000 into rehab (to show 'forced appreciation'), you could use the new $280k value (or whatever new appraisal comes in at), and cashout at 75-80% LTV (depending on your credit, state, DSCR, property type etc) for a $210,000 to $224,000 new loan amount.
The purchase money is more difficult... You could use gap funding for the down payment which usually I dont recommend on long term rentals but given you'd cashout and pay off the gap funding loan very quickly (assuming the scenario above) it could be a good fit. These loans are based on personal credit, income (1040 Fed Tax Return Taxable income), DTI, and credit utilization. You'd also have to work with a lender on the acquisition who allows for gap funding, as not all lenders do!
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