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Hi,

I'm considering buying a home (w/ 20% down), and then immediately updating/remodeling it (about 20% of the home value). Is there any way to finance the remodel cost? I'm in Texas, where there's an 80% LTV requirement for home equity loans, so I can't finance any of the remodel that way. I could simply put less down on the house, but that adds PMI. Ideally I'd like to add the cost of the remodel into the 30 year loan, but I've talked to various lenders, and there's no way to do that. Any ideas? I *could* just suck it up and pay for the remodel out of pocket, but that drains my cash reserves to a level I'm not comfortable with so I'm not willing to do that. Thanks!

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How much would you get back if you sell the house today? Just curious to know if the whole thing was worth it? If now, h... (more)

Shaksdeals (Feb. 17, 2010 @ 1:35p) |

Well I live there.. it wasn't an investment purchase. So it was worth it to me to do certain improvements that I might... (more)

Rathipon (Feb. 19, 2010 @ 8:12p) |

I think you concluded by answering your own question, and it sounds like your goal of getting into a smaller home in a b... (more)

glxpass (Feb. 19, 2010 @ 10:32p) |

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I am not going to tell you whether what you are going to do is right or not (trust me many posts will be doing just that), assuming you have enough untapped credit lines and good credit, you can drain your savings to some extent. It is not really sucking if you can avoid paying interest, right?

Pay out of pocket temporarily, have house reappraised after completion of major renovations, get HELOC and then draw out the amount of renovations and replace in savings. Or just have HELOC open in case funds are needed.

Pay for remodel using CC get Cash Back pay down mortgage. Then do what they said above.

HomeDepot still offers credit cards and you don't have to make any payments for a year. hey also give you 10% off your first purchase

Some people would tell you to not buy what you can't afford. But you know what I call those people? Responsible.

I get the vibe that, in my situation, most of you would walk away from this house, rather than wind up in a situation where you're equity heavy/cash light. Do you guys consider that a high risk scenario?

I did something similar on my recent home purchase. I purchased a fixer upper in an excellent neighborhood. The house was $470k and after 20% downpayment I spent an additional 90k (or about 20% of the purchase price) on the remodel. Between the down payment on the house and the cost of the remodel it significantly depleted my cash reserves. In retrospect I may have been better off financing an already remodelled house that cost $100k more. Certainly I would have more cash in the bank now. Paying out of pocket for the remodel represented a significant opportunity cost.

OP's question isn't so much a question of affordability as it is a question
of the best way to finance such a purchase.

Right now, I'm looking at houses in relatively affluent neighborhoods that can
be bought for less than what it costs to build them, even after
factoring in the approximately $50k in "remodelling" costs.

The problem is, a bank gets skittish when you come to them and ask for a loan
to not only buy the property, but also ask for additional money to immediately
start changing it.

I'm reiterating OP's question in asking for other's opinions on which approach
would have the best success and/or be least stressful to finance such a purchase.

I'm in a similar boat to OP. I have the cash to do the remodelling, but would
prefer to finance it. I also have a hunch that the extremely low purchase price
would hinder an immediate refinancing after completing the remodelling. I also
believe it would hinder obtaining a HELOC to finance the remodelling. But alas I
don't have much experience would like to hear about others experiences/opinions
given the current economic environment.

Thanks in advance.

there are several mortgage products that will provide funds to acquire and renovate. these are generally superior to 2nd mortgage products or credit cards unless you are expecting to pay for the remodel over a very short horizon. beats refinancing and paying a second set of closign cost

based on the description provided, look for a lender that write fannie mae homestyle loans. in your position i would compare that to 1. a straight fha purchase with less down or 2. putting it on a heloc or zero interest card and paying back the remod quickly (if viable) and see whats save you the most over the time you expect to hold the note.

keep in mind most helocs only go to 80 or 85% anymore and in texas, good luck with seconds alltogether

There are loans out there for this specific purpose. There is a conventional renovation mortgage from Wells Fargo that will do a purchase & renovate. There is a FHA 203(k) loan that will also do a purchase and renovate with very little down as well. The rates a bit higher than normal 30 yr mortgages. If you can afford making payments these should be very viable loans for you.

How wise or unwise this idea is has a lot to do what draining your cash reserves to a point you are uncomfortable with. If that means you feel uncomfortable with less then 500K in cash and you would only have 450K in cash that is different then you are using up ever single last penny you own and then some. There is then a broad range in between.

How long do you intend to live here? Have you planed for your revovations to go over time and over budget because that is most common? Have you ever owned a house before? When I bought mine I was shocked how much maintence time and cost was even without major renovation projects? Do you have the time to take this on as a 2nd part time job almost as major home renovations take a ton of time?How liveable is it without the renovations?
You do realize that renovations never recoup their full cost in home value later, right?

Is it possible to get a 3% down FHA loan, pay the PMI for now, and then when the renovations are complete, get the house reappraised, pay any additional money to get to 80% equity, and get out of PMI?

This would be the third home I've owned, and it's a substantially smaller home than my current one. The goal is to get into a smaller home on a bigger lot in a better neighborhood. From a home maintenance perspective I expect my monthly cash flow would actually increase as a result of this switch. The problem I'm having is no one builds smaller homes (2800sf) on bigger lots (1/2 acre+), so I've got to either buy land and build (which I don't wan't to do), or buy an older home (built in the 70s) from when this sort of configuration was in vogue. At this point I'm leaning towards walking away from this property, and waiting for something already remodeled to come along. If it never does, then I'll just stay put.

dk240t said: Is it possible to get a 3% down FHA loan, pay the PMI for now, and then when the renovations are complete, get the house reappraised, pay any additional money to get to 80% equity, and get out of PMI?


Yes, but there will be Upfront Mortgage Insurance Premium that will be included in your Closing cost. This cost can be rolled into your mortgage. Of course this would mean that you will be borrowing more and have to pay interest on that amount that is borrowed. You can refinance a FHA loan 6 months after the loan has been issued.

What area are you in that 2800sf constitutes a "smaller home"?

arch8ngel said: What area are you in that 2800sf constitutes a "smaller home"?
LOL. I'm in North Texas. I'm currently in a 3300sf home on a 65x125 lot.

We're just about done with a similar situation. We're using some 0% cards plus some savings to finance the improvements, and once we're finished we're planning on taking out a home equity loan. We got a very good deal on the house (which played a big part in our decision to take on this kind of financial risk), and our mortgage on it should be ~50% of the remodeled home's value, so we don't foresee issues with taking out some equity. Note that some lenders are wary of revaluing a home less than a year after it was bought.

Fwiw, we looked into the Wells purchase and renovate loan, but it looked like it would be a long, painful process with a lot of red tape. Your opinion may vary, of course.

Finally, if you do what we did, make sure you have a nice fat margin of error on the remodeling costs, as those have a way of constantly going higher. We did, and I'm very glad we did. And make sure you have a good architect and contractor.

Can the remodel be broken down into parts and done over time, while you live there, rather than immediately?

If I was in your situation, I'd lean towards buying the house normally with 20% down, using some of my cash to do the most important remodel work, and waiting/saving to do the rest of the remodeling. I know it is taboo to even think of saving for something rather than just financing it, but it is worth considering. Is it necessary to do the whole remodel in one shot immediately?

BarryAndLevon said: We're just about done with a similar situation. We're using some 0% cards plus some savings to finance the improvements, and once we're finished we're planning on taking out a home equity loan. We got a very good deal on the house (which played a big part in our decision to take on this kind of financial risk), and our mortgage on it should be ~50% of the remodeled home's value, so we don't foresee issues with taking out some equity. Note that some lenders are wary of revaluing a home less than a year after it was bought.

Fwiw, we looked into the Wells purchase and renovate loan, but it looked like it would be a long, painful process with a lot of red tape. Your opinion may vary, of course.

Finally, if you do what we did, make sure you have a nice fat margin of error on the remodeling costs, as those have a way of constantly going higher. We did, and I'm very glad we did. And make sure you have a good architect and contractor.


+1

If you put the cost onto 0% cards but then run out of money before the remodel is completed, I doubt any bank would talk to you about pulling money out to finish the project. That would be a hard place to be in, even more so because you just ran up a bunch of credit card debt. Where else would you go for cash?

dk240t said: Can the remodel be broken down into parts and done over time, while you live there, rather than immediately?

If I was in your situation, I'd lean towards buying the house normally with 20% down, using some of my cash to do the most important remodel work, and waiting/saving to do the rest of the remodeling. I know it is taboo to even think of saving for something rather than just financing it, but it is worth considering. Is it necessary to do the whole remodel in one shot immediately?


It depends on the loan. With conventional renovation and fha 203k loans you can take up to 6 months after closing to complete remodeling.

if one does not have the cash in hand for a remodel, they probably shouldnt do it. If your DTI is super low and you are able to pay back a 0% (or even %) BT in 12 months, then perhaps that is a possibility....but if your project goes over budget...

Rathipon said: I did something similar on my recent home purchase. I purchased a fixer upper in an excellent neighborhood. The house was $470k and after 20% downpayment I spent an additional 90k (or about 20% of the purchase price) on the remodel. Between the down payment on the house and the cost of the remodel it significantly depleted my cash reserves. In retrospect I may have been better off financing an already remodelled house that cost $100k more. Certainly I would have more cash in the bank now. Paying out of pocket for the remodel represented a significant opportunity cost.

How much would you get back if you sell the house today? Just curious to know if the whole thing was worth it? If now, how long you think it would take to break even?

Well I live there.. it wasn't an investment purchase. So it was worth it to me to do certain improvements that I might not have otherwise done if it was a for-profit undertaking. If I was flipping it, for instance, I probably would have gotten cheaper siding. Less electrical work. Single zone central AC instead of dual zone. Cheaper windows. Etc. But regardless, I think if I were to sell it now I would more or less break even on the sale price but lose money once transactional costs are factored in.

KenSimone said: This would be the third home I've owned, and it's a substantially smaller home than my current one. The goal is to get into a smaller home on a bigger lot in a better neighborhood. From a home maintenance perspective I expect my monthly cash flow would actually increase as a result of this switch. The problem I'm having is no one builds smaller homes (2800sf) on bigger lots (1/2 acre+), so I've got to either buy land and build (which I don't wan't to do), or buy an older home (built in the 70s) from when this sort of configuration was in vogue. At this point I'm leaning towards walking away from this property, and waiting for something already remodeled to come along. If it never does, then I'll just stay put.
I think you concluded by answering your own question, and it sounds like your goal of getting into a smaller home in a better neighborhood isn't a high priority.

In our case, we bought the smallest home in a great neighborhood (with excellent schools), remodeled the kitchen 4 years later with a cash-out re-fi (in those days, home appreciation made all the difference for the increased equity, and our income was higher), and remodeled the bathrooms and added a family room 9 years after that (again, home appreciation and increased income made another cash-out re-fi doable).

The point is that we chose a home we were planning to stay in for the long-term, we were lucky enough to see significant home appreciation (although we've lost about 10% - 15% of our home value from its peak) and increased income, and, most importantly, we were patient. This was our first home and will probably be our only home.

My wife and I are looking to do another kitchen remodel. We have enough money in the bank to pay cash for it, but we've decided to wait a year in order to see how much extra savings and earned interest (from RCAs and CDs) we can accrue, how much credit card c@shback we can get using strategies discussed in FWF, and taking advantage of various deposit account opening bonuses. Our goal is to maximize our profit from these activities and thus minimize the hit to our current principal. We're even going to sell one of our two cars (both have no loans against them), since one car is sufficient for our needs.

I guess if I had any advice for you about how to finance your remodel/update (if you actually bought the house), it would be summarized in one word: "Wait..."

ETA: ...and pursue a strategy that will accumulate funds for the remodel/update. If it were three years ago, I'd use OPM (other people's money) in the form of an AOR, bank it, and let the profits from accrued interest contribute to the remodel. With the tight credit environment and comparatively unfavorable BT terms, the AOR strategy is much less appealing.



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