Financingly Speaking...

Recapping the last post:

I decided to make an offer on a fixer upper house in Ballard.  I was looking for something of a project.  The interesting thing on this house, was that it came with plans and permits for doing the work.  Here's basically what needed to be done on house:

Good:

• The house was built in 1946, and seemed structurally sound.
• The furnace is brand new and converted to gas.
• Same with the water heater.
• Huge yard.
• The plans for updating it were great.

Bad:

• All wiring needed to updated
• Same with the Roof.
• Same with the plumbing.
• Same with the Kitchen.
• Basically it was an estate sale with plenty of deferred maintenance.

Like I mentioned, there were plans and permits for doing all that work I mentioned above.  Going into putting an offer on a house and seeing all that work to be done can be a bit daunting.  So keep an open mind.  If you have a good contractor, (and if you're looking to do a fixer, you should start that before making an offer) you can walk through with him and get a "spitball" estimate for the work before even making an offer.  This can be really helpful, you know what you're getting into.

Anyway, back to the house...

Here was a bit of what the plans were laying out.  

As opposed to now:

So the roof needs to be replaced, might as well do that dormer to make a bigger master bedroom, and bath right?  One thing I learned selling my previous house, the master bed/bath is a must for many buyers.  And since the roof is off, might as well update the wiring and plumbing as part of this too right?

Anyway after running the numbers, the amount of work + the buying price of the house made sense from a value proposition.  We made an offer and it was accepted by the seller!!!  Now we just have to deal with financing.

Financing a fixer:

There's a few options when financing a house like this.  Some are easier than others.  When financing a regular house, the bank will appraise the house, which they might find some things wrong that they require to be fixed to approve the loan.  For example, the house has to have a stove, heating, good wiring, a roof, etc.  Because of the nature of the house they were sure to complain about a few things.  So the other options were:

1. Do a conventional loan with an "escrow holdback".  This means you would put extra cash in the escrow account, to fix the issues the bank has.  If there were minor issues this is a great idea.  However because of the extensive repairs this wouldn't work here.
2. FHA 203k, Homestyle remodel loans:  These are government backed programs where the bank finances the buying price and the repair price.  You have to submit plenty of paperwork to the bank outlining the plans and what the work will cost.  Most licensed contractors should be able to handle this.  As the work gets done, the bank pays out to the contractor (you the homeowner gets to sign off the checks as well).  
3. Washington Federal rehab loans:  Some banks have their own rehab loan programs, Washington Federal bank is a local one that had a good one.  It's very similar to the FHA program above, but had a few less fees, and didn't require mortgage insurance.  Also, talking to a few contractors, they said WA fed was easier to work with.

I decided to go with Washington Federal.  Normally the closing period after you make an offer on a house to closing a loan is 30 days.  With a rehab loan you need 60-90 days to close.  There's a few things that take time that the loan requires.

1. Plans and permits.  Luckily like I said, the plans and permits were already done when I made my offer.  If you have to do these yourself you'll need more than 60 days.
2. Finding a contractor.  If you don't already one you want to use, you'll interview contractors.  I would suggest walking through the house and getting verbal estimates from at least 3.  More important is talking to contractors and getting a feel of how working with them would be.  I settled on Canright Construction who were recommended by a friend, and came in with a great price.  Also the owner, Greg, is an awesome guy who I immediately trusted.
3. Getting the estimate from the contractor.  After settling on who you want to use, you need to get a complete estimate from the contractor, where they outline on a spreadsheet all the costs.  For example this will say "1000$ for installing carpet".  This is going to be submitted to the bank for the bank's appraisal.  Usually the bank will require info on the contractor like license, insurance, etc.  They want to make sure the contractor isn't going to disappear halfway through the project.
4. The bank's appraisal.  Basically what the bank is going to do is figure out what the house is going to be work AFTER the construction.  They use the plans and construction costs to figure this out.  So then you have the price of the house, which is calculated as your purchase price PLUS the construction cost.  Then they have the appraisal which tells them what the house will be worth after.  They use the lessor of these two numbers to base the loan to value ratio off of.  They also want to be sure the value after is worth more than what is going in.  So if they need to the loan to value ratio to be 80% (this is normal for loans if you want to avoid mortgage insurance) you need to have the loan be 80% of the house + construction.  Here's some real made up numbers for example:  Let's say you buy a house for 300K and the construction is 100K.  If the appraisal is for > 400K, then the loan to value will have to be 80% of 400K or 350K.  So your down payment will have to be 50K.
5. Then closing the loan.  It sounds like alot.  It was a bit of work, especially interviewing and coordinating.  Luckily Canright did a great job of putting together a great plan and estimate and helping with the bank.  So after 60 days, we closed, and could start construction.

Next post, starting construction.