All Forum Posts by: Perry Farella

HI. I can see no good reason to do any sort of adjustable rate loan unless you know for CERTAIN you are selling in 5 years. What if interest rates are on an upward cycle in 5 years ? Usually a 5 year ARM allows a whopping 2% increase in the 6 th year if rates are higher, can you take that increased payment ?

Safe bet is to try to get a conventional high balance loan rather than any new FHA loan when you refi. I believe that even a 15 year terms FHA loan require mortgage insurance paid for 11 years. Try a conventional 75% loan so no mortgage insurance, maybe no cash out, depends on value an d what you owe. All those fees are ridiculous, there should be no "points" to pay.

Just my thought but it might be wiser to separate the two goals, 1) buying investment property and 2) remodeling your current kitchen. I think the two are very different goals with different payback. A new kitchen you can use and enjoy everyday and it will add some value into your home, not necessarily dollar for dollar but possibly. There is no way to get that cash back unless you rent rooms in your current home to AirBNB guests perhaps. So use that cash wisely.

A HELOC is a possibility but terms may be less than favorable and you put more debt on your personal home. Not necessarily a bad idea but what if you need to sell that home soon due to a growing family for example, there is more debt to pay off before perhaps the new kitchen has added enough resale value, not sure. You may live in a state or county or city that actually taxes a refinance or HELOC to inflate fees , not sure but check that. NY has very high taxes on a refinance I know for example.

So that leaves an all cash deal for your investment property if you have enough cash and paying for the new kitchen with all cash. So two very different goals to finance.

That's why I remain a fan of debt, if you really need a mortgage, to have it all on the investment property. That way if there was a loss of income or employment etc. If worse came to worst you still have you personal residence with less mortgage on it. Knowing that you can buy an investment property and all the funds needed to rehab it using a 15% down payment is in my opinion a safer option that many don't realize exisits so still look at cash out refi's or HELOCs on their personal residence.

Another option for you may be a conventional loan called HomeStyle. It can be for 30 years, so lower payment versus a Hard Money Lender. Advantage is the house will be appraised for its ARV, not what you pay for it today. The down payment is 15% based on sum of purchase price, say 40,000 + rehab dollars, say 40,000 so total is 80,000 times 15% or 12,000 down and you get 40k to rehab, one loan, one payment, fixed for 30 years. You can sell any time and pay off the loan and do the next one, no pre-payment penalty. Rates are based on your credit score so its a personal loan in your name, not the name of your LLC. Advantage also is the future rent will be projected by an Appraiser and you will get 75% of the future rent as extra income to qualify for the loan automatically. So qualifying can be easier this way even though you may plan to sell and never rent, the lender cant forecast that. I have written about it and do it for my own clients if you have questions.

Just to chime here as a VA lender. Yes this is a great idea to fund a 3 or 4 unit with zero down on a VA loan. If you get new orders ( assuming you are active) there is no issue with the VA loan allowing you to lease prior to the 12 month " live there" rule. If you are not active then there is no issue since you can stay for the 12 months prior to leasing out all units.

On the newer VA Renovation loan I can say for certain that you can take 180 days to make a larger rehab that includes structural changes ( knocking down walls etc.). The version of the VA renovation loan I have access to will function like that and not all VA lenders allow that. Most want a simple "cosmetic" rehab that can be finished in 90 days.

Regardless, I always advise any VA loan buyer to write an offer such that Seller pays 4% of sale price back to Buyer to pay all possible closing costs and pre-paid items ( like the first years worth of home owner insurance, etc.). That way there is not only ZERO dollars needed at a VA closing but Buyer may get cash back in the form of pro-rated property tax funds if property taxes are paid in arrears in your county. Very few loans allow the Buyer to walk out with cash and bring zero dollars to closing but structured this way , a VA loan will allow that.

Just to chime in here, there is another option. Meaning that some people who wish to pay off their primary residence mortgage may not want to encumber that property with extra debt by taking a larger, cash out mortgage to fund an investment property. Meaning that why put all the debt and larger mortgage payment on your personal home just in case there is a loss of income in the future etc. There is a 30 year ( or 15 year) conventional loan for Investors called HomeStyle that is meant for a fix/flipper to buy the house ( 1 unit only) with a 15% down payment. That is sum of purchase price + rehab dollars needed times 15%. Then you have all the debt on the investment property and not your personal residence. Then work the numbers such that future rent provides all the cash flow to fully make the payment and then some in the future. Advantage is house is appraised to future ARV, not what you pay for it today. Or sell it after rehab and keep the profit for the next one. There is security in not using private Hard Money in that you can take a 30 year low payment, fixed for 30 years but yet sell at any time with no pre-payment penalty. I have written more about this approach in my Blog here on BP and on my site.

HI,

The rehab loan for Investors of 2 to 4 unit properties is a product called EZ Conventional. It follows conventional loan limits basically. Below at are the highlights:

To add on you stated above the house was appraised by the State for 90,000. So your current equity in its current condition is 90,000. If you really need 300,000 to rehab then with HomeStyle , as a 1 unit only, the ARV should be $400,000. Meaning that with HomeStyle you cab be mortgaged as an Investment refinance to 75% of ARV and the rehab loan size is capped at 75% of ARV. Or in this case if ARV is really $400,000 ( as a 1 unit) then you can be mortgaged to 75% of that or $300,000. There is no down payment needed as you are mortgaged only to 75% of ARV. So in effect your equity would be the 90,000 there today.

To answer the questions of :

1. I didnt see it explicitly stated anywhere that already owning the home means you don't need a down payment. Can you point out where you are getting that info?

******* This would fall under the category of HomeStyle Refinance loan. Meaning that you have equity ( or effectively a down payment) already in the home since you have it with no current mortgage. I. E. if its worth $20,000 in its current unrehabbed state then that's the equity or down payment for a refinance loan. HomeStyle allows a Refinance loan to be up to 75% of the ARV, whatever that might be. So the equity ( down payment) is in the subject property already with no further funds needed.

2. The plan for the home was to create 2 units to rent (1 on each floor). I saw that for investment properties the home had to be a 1 unit. Does this mean I would be unable to use HomeStyle to turn this 1 unit house into a 2 unit rental?

********  Correct HomeStyle for Investors allows only a 1 unit property, not 2.

For Investors the HomeStyle loan will allow a single family home to be purchased with as little as 15% down and have some nominal private mortgage insurance based on borrowers credit score. For multi unit properties there is also a renovation loan up to 4 units ( fourplex) as well for Investors who will never live there or fix & flip. For 2 to 4 units the down payment rises to 25% off the sum of purchase price + rehab dollars. Rates are all based on30 year terms so less pressure than any Hard Money type loan and rates are around 6% for 30 years which offer security and all the debt is on the investment property rather than HELOC on your primary residence. If you wish to owner occupy for at least 12months then HomeStyle also is a good option but must have 25% down for 2 to 4 units properties.

If you intend to live there at least 12 months then I would agree that a FHA 203K is an attractive option in that even at 3.50% down you can still get all the rehab money needed and then later refinance out of that loan to one with no mortgage insurance.

Each of these loans will require the use of a locally licensed General Contractor or licensed sub-contractors to perform the work. These loans are not like Hard Money where you get a bucket of cash to spend as you wish with no experienced supervision. But they offer the security of a fixed rate for up to 30 years and assistance/oversight of lenders construction consultant to see all work performed with Permits and acceptable to local building codes. I write more about each on my blog or send me quesitosn any time.

As mentioned above HomeStyle is a great option here because it allows an Investor who will never occupy the house to have a rehab + purchase loan. But down payment is minimum 15% off the sum of purchase price + rehab dollars needed. I'm curious though in this case if the local zoning authority has given zoning approval and will issue building Permits to renovate the garage into a separate apartment ?  If not then none of these loans will work because they need to see Permits prior to releasing rehab funds.