Renovation Opions on a New Home With Low Equity
June 6, 2011 7:03 PM Subscribe
What financing options are available for first time home-buyers who want to have some cash available after closing to make some repairs and renovations before moving in?
We are getting very close to putting in an offer on a house that we very much like, but we have some questions about financing some repairs and updates, including ripping up the carpet in the bedrooms and refinishing the wood floor beneath, and doing some updates to the basement (starting with installing a drainage system).
Right now we have just about enough money saved up to put 20% down on the house, keeping a small cushion of savings. However, if we do that we will not be able to afford to make these changes immediately (and we obviously would like to do at least the floors BEFORE moving in).
One option that's been suggested would be to put only 15% down and use the remaining money to make the needed repairs, or increasing our offer if the seller will pay closing costs allowing us to recoup that. Before we go those routes, however, I want to know if there are other options for financing home renovations without much equity. This seemed like a good job for the hive mind. What other ways are there of getting the money to improve a newly purchased house, and how did they work out for you in the end? Certain kinds of loans? Gut it out with credit cards? Wait for the expensive stuff til we could refinance?
We are getting very close to putting in an offer on a house that we very much like, but we have some questions about financing some repairs and updates, including ripping up the carpet in the bedrooms and refinishing the wood floor beneath, and doing some updates to the basement (starting with installing a drainage system).
Right now we have just about enough money saved up to put 20% down on the house, keeping a small cushion of savings. However, if we do that we will not be able to afford to make these changes immediately (and we obviously would like to do at least the floors BEFORE moving in).
One option that's been suggested would be to put only 15% down and use the remaining money to make the needed repairs, or increasing our offer if the seller will pay closing costs allowing us to recoup that. Before we go those routes, however, I want to know if there are other options for financing home renovations without much equity. This seemed like a good job for the hive mind. What other ways are there of getting the money to improve a newly purchased house, and how did they work out for you in the end? Certain kinds of loans? Gut it out with credit cards? Wait for the expensive stuff til we could refinance?
One option would be the FHA 203K program, which allows you to finance both the home and any necessary repairs. Be aware that you need to find a mortgage broker who is experienced with these kinds of loans, as there are even more potential problems with obtaining financing than with the standard FHA loan.
That having been said, we just bought a house which needed $10K of repairs and updates, and elected to put down a smaller down payment and do the repairs instead. With interest rates as low as they are, the difference in our monthly payment was minimal, and we don't have to live with fugly carpeted floors. Before going this route, get bids on everything and make sure you know the full cost of the project. Drainage systems can get pricey, I hear!
posted by Wavelet at 7:46 PM on June 6, 2011
That having been said, we just bought a house which needed $10K of repairs and updates, and elected to put down a smaller down payment and do the repairs instead. With interest rates as low as they are, the difference in our monthly payment was minimal, and we don't have to live with fugly carpeted floors. Before going this route, get bids on everything and make sure you know the full cost of the project. Drainage systems can get pricey, I hear!
posted by Wavelet at 7:46 PM on June 6, 2011
The Federal Housing Administration insures a variety of loans that might meet your needs. These are called FHA loans. You can put as little as 3.5% down on an FHA loan, but you end up with a slightly higher rate and you have to pay mortgage insurance, which is no longer tax deductible, until you've paid down to 80% of appraised value.
FHA handyman and fixer-upper loans, also called 203(k) loans, are another option. From the web page:
This stuff is complicated. If your mortgage agent hasn't discussed these issues with you, she's not earning her fee.
posted by Protocols of the Elders of Sockpuppetry at 7:50 PM on June 6, 2011
FHA handyman and fixer-upper loans, also called 203(k) loans, are another option. From the web page:
The purchase of a house that needs repair is often a catch-22 situation, because the bank won't lend the money to buy the house until the repairs are complete, and the repairs can't be done until the house has been purchased.Most folks who can pass appraisal - i.e. the house is in salable condition without repairs - don't need a 203(k). Some houses need repairs before they can legally have title transferred - that's mainly what the 203(k) is for.
HUD's 203(k) program can help you with this quagmire and allow you to purchase or refinance a property plus include in the loan the cost of making the repairs and improvements. The FHA insured 203(k) loan is provided through approved mortgage lenders nationwide. It is available to persons wanting to occupy the home.
This stuff is complicated. If your mortgage agent hasn't discussed these issues with you, she's not earning her fee.
posted by Protocols of the Elders of Sockpuppetry at 7:50 PM on June 6, 2011
If the house is empty, refinishing the floors is a lot easier to do yourself than you might imagine. Renting a sander for a day can you several thousand dollars in labour costs.
http://homedepotrents.com/diyTools/drum_sander.asp
posted by Nightman at 7:51 PM on June 6, 2011 [1 favorite]
http://homedepotrents.com/diyTools/drum_sander.asp
posted by Nightman at 7:51 PM on June 6, 2011 [1 favorite]
I just bought a condo and the offered price included an $8K credit for closing costs. So basically I put down my 3.5% (FHA loan) and that was it - I didn't pay any cash up front for closing costs or anything. In fact, I got a refund of around $300. I think what happened is that I financed the 8K in my 4.75% loan which worked out well for me, since the loan payments are low enough that I can pay a bit more up front and I didn't have to come up with a lot of cash. In the long run I'll pay off the closing costs at a really low rate.
Also, I'm looking at this place as something that I'll improve over the long term; the kitchen and bath could use some updating, but I am OK with them for now. In the next year or two I'll probably have the money to update them. Before I moved in, I painted the whole place and had a new carpet put in (total ~$2.5K). That was enough to make it feel like this place is mine.
Re-reading your question - first, get as much as you can from the seller. Your inspections should tell you what must be fixed/replaced right away. Use that to your bargaining advantage (you do know that you should never get overly-attached to a house you want to buy, right??). Second, get as much as you can from the seller. Seriously, put all kinds of contingencies into the offer. This is where the not-being-attached part comes in. Act like you have nothing to lose and ask for everything you want and then a little more. If you have a good buyers' agent they will be doing this for you.
Third, consider putting less than 20% down. Ostensibly your mortgage will be at a really really low rate. Mine is 4.75%, what's yours? If you end up borrowing an extra $5K that you don't put down, it's not the end of the world. Maybe you can use that extra $5K to replace something - if you can't get the seller to cover it of course. Consider that $5K an early home equity loan, and use it to make necessary improvements.
posted by bendy at 11:20 PM on June 6, 2011
Also, I'm looking at this place as something that I'll improve over the long term; the kitchen and bath could use some updating, but I am OK with them for now. In the next year or two I'll probably have the money to update them. Before I moved in, I painted the whole place and had a new carpet put in (total ~$2.5K). That was enough to make it feel like this place is mine.
Re-reading your question - first, get as much as you can from the seller. Your inspections should tell you what must be fixed/replaced right away. Use that to your bargaining advantage (you do know that you should never get overly-attached to a house you want to buy, right??). Second, get as much as you can from the seller. Seriously, put all kinds of contingencies into the offer. This is where the not-being-attached part comes in. Act like you have nothing to lose and ask for everything you want and then a little more. If you have a good buyers' agent they will be doing this for you.
Third, consider putting less than 20% down. Ostensibly your mortgage will be at a really really low rate. Mine is 4.75%, what's yours? If you end up borrowing an extra $5K that you don't put down, it's not the end of the world. Maybe you can use that extra $5K to replace something - if you can't get the seller to cover it of course. Consider that $5K an early home equity loan, and use it to make necessary improvements.
posted by bendy at 11:20 PM on June 6, 2011
Re-re-rereading your question: a mortgage is one of the lowest-rate consumer loans you will ever get. So, compare the costs of putting ten percent down and using the extra cash to fix up your home versus putting twenty percent down and taking out another loan to make repairs. I can almost guarantee you that putting a little less money down - as long as you put the remainder into the home - will work to your advantage.
posted by bendy at 11:27 PM on June 6, 2011
posted by bendy at 11:27 PM on June 6, 2011
FNMA has a renovation loan program similar to the FHA loan, but without the added FHA costs. Only two banks I spoke to here in Seattle offered it, so you will want to call around. $30,000 at 4.25% is quite cheap and handled a ton of updating on a house that hadn't really been touched since the Eisenhower administration.
posted by lantius at 11:45 PM on June 6, 2011
posted by lantius at 11:45 PM on June 6, 2011
Not replying to anyone in particular, but I have a comment on putting down less than 20%...
You can write off mortgage interest on your taxes. You can't write off PMI. Every single penny you put toward PMI (about $50 per month per 100k of the loan) amounts to pure waste. You don't get it back, it doesn't lower your principle, it doesn't lower your taxes, you don't even get anything from it in a worst-case scenario (It covers the bank, not you).
Also, don't think that you'll only have to pay it for at most 20% of the term of the mortgage... The structure of a typical mortgage has you paying more interest and less principle early on, so it will actually take quite a bit longer to reach 20% equity... 30 years at 4% interest will take a third of the life of the mortgage, and it gets worse with longer terms or higher interest.
If at all possible, always put down 20%. It will save you tens of thousands of dollars over time.
posted by pla at 9:11 AM on June 8, 2011
You can write off mortgage interest on your taxes. You can't write off PMI. Every single penny you put toward PMI (about $50 per month per 100k of the loan) amounts to pure waste. You don't get it back, it doesn't lower your principle, it doesn't lower your taxes, you don't even get anything from it in a worst-case scenario (It covers the bank, not you).
Also, don't think that you'll only have to pay it for at most 20% of the term of the mortgage... The structure of a typical mortgage has you paying more interest and less principle early on, so it will actually take quite a bit longer to reach 20% equity... 30 years at 4% interest will take a third of the life of the mortgage, and it gets worse with longer terms or higher interest.
If at all possible, always put down 20%. It will save you tens of thousands of dollars over time.
posted by pla at 9:11 AM on June 8, 2011
Good point pla, but it's still a math exercise. If $50/month is still less than what you would pay for a personal or home equity loan it may be worth it for 24-36 months. Every situation is different. If you buy low enough and are able to pay extra on your mortgage (switch to bi- weekly payments and round up), you'll be able to work your way out of PMI relatively quickly.
posted by bendy at 5:41 PM on July 1, 2011
posted by bendy at 5:41 PM on July 1, 2011
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You can roll the closing costs into the mortgage.
You can take out a separate loan to cover the downpayment.
All of those will cost you more per month, and the third will cost you a lot more for a few years.
That said, if at all possible, I'd recommend just putting the 20% down and space your repairs out over the next few years. You'll discover a lot of unexpected costs in the first year, which can cause serious problems if you've already sunk every penny of your income. Personally, I found myself blowing a good $1500/mo at Home Depot for the first six months (and two years later, still frequently spend a few hundred there just for the house). And I didn't buy a "fixer-upper".
posted by pla at 7:29 PM on June 6, 2011 [1 favorite]