PMI on Bank & Owner Financing?

Question

My wife and I are looking to buy a new PR and convert our existing one to a rental. With a new baby on the way we could use the room. The plan is for the new home to be a live in flip for 2-4 years. I am going to look at a property this week. Notes on the property are possible seller financing. Last sale price was $54k in 2001. So obvious equity in the home. It’s listed for 139,900. It needs complete updating but appears to be a very good candidate for our plan.

My goal was to offer 3 offers on the home: 100% owner financed price, hybrid bank and owner finance, and conventional loan price. All based on homes condition, comps, etc.

My question is this: if we did 30% owner financing, would the conventional loan still require PMI? Or since they’d be in a first position at 70% they wouldn’t?

Thanks!

Tom S. · Answer

@John Leonard Smart to pass on this one!  Just a future note (following up on your original question) , I've never come across a conventional lender that would allow 70% conventional and 30% owner financing (or any ratios like that, that sum to 100% financing).  Possibly with commercial financing only.

John Leonard · Answer

@Tom S.

Thanks Tom, that’s good to know!

John Leonard · Answer

@Jaysen Medhurst

House was a dude, represented as a 4br when it’s a 3. And it had foundation issues from years of people punching holes through it for one pipe or another..

Pass!

John Leonard · Answer

@Jaysen Medhurst

Yeah not in a spot to do cash (eventually that’s my goal). As I’m just getting started.

Yeah I wouldn’t do the $139k asking with conventional financing.

I’ll know more after tomorrow’s walk!

Jaysen Medhurst · Answer

@John Leonard, worst-case scenario is that you break even at $200k. I wouldn't count on this as a rental. It won't hit the 1% rule based on your purchase price, let alone the ARV.

I'd consider an offer of around $100k, this allows you to hit the 70% rule (assuming $40k of work and $200k ARV). Anyway you could offer cash?

John Leonard · Answer

@Jaysen Medhurst

Thanks, all really good points! Doing my first walk through tomorrow. So I’m not sure on total condition of the property. Pictures are limited.

Comps would be $200-$225k. It’s a 4br brick two story just on the edge of our historic downtown area. I’m about 50mins north of Charlotte, NC. The whole downtown area gentrified, turned low income, turned rental area, and now these houses are being bought up quickly and refurbished, then sold. Some nicer ones north of $300k.

I’d estimate $40-60k at least depending on how much work I’d do. But a full kitchen, and two bath remodel plus refinish and repair all the hardwood floors, paint. Unsure of HVAC age but it’s forced air.

I can get a conventional loan. We have the cash for the down payment. I’d love to be able to save the cash though. As we will have a rental we need reserves for, and of course getting started on the rehab.

And yeah....this is baby #3! But you know kids adapt! It’s me and my wife that go crazy! Lol

I also know I rent comps would be $1200-1300 if I decided to rent it out instead of flipping it.

Jaysen Medhurst · Answer

@John Leonard, assuming the current owner put down 20% on a 30-year mortgage, he still owes ~$28k. That will have to be paid off at the time of sale, so 100% owner financing wouldn't be possible.

I believe you can get away without PMI in the case of 30% owner financing. You do need to think about what that deal looks like. How long will the OF note be? At what rate? They may want all of their money in 5 years and who can blame them?

You said you want this to be a live-in flip. What's the ARV you hope to achieve in 2-4 years? How much money will you have to put into the renovations?

On a personal note the idea of a live-in flip with a newborn sounds like a nightmare. I've got 2 kids, I would never try that.

PMI on Bank & Owner Financing?

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