On this episode of Secrets to Real Estate Investing by House Flip Masters Holly is joined by guest Matt Cady. Matt is going to share tips about financing for listeners especially those who might be confused about how financing works. Matt has been a mortgage consultant for 17 years with a background in construction financing. In 2007 when most construction products went away Matt started providing renovation loans. Matt works in San Clemente California for a Summit Lending.
Holly says that often times people who want to get into house flipping don’t have lots of cash or want to take advantage of the tax free capital gains that you can get from living in a house for 2 years. Holly asks Matt to share with listeners the difference between the different scenarios. Matt says these programs are great for those who are looking to minimize their down payment and to have a better alternative than a hard money loan. Matt says that renovation loans will save you about half the money in interest that you would normally pay with a hard money loan. Matt says that renovation loans are applicable to FHA and conventional purchases. Matt gives an example that if a buyer is going to live in the house with FHA they would only have to put down 3.5% of the total cost of the house. Holly adds that with hard money loans 2 points are usually added to them which means that renovation loans definitely will save over half on the loan.
Holly asks Matt to share what the rules are on the amount of money a person can take for renovating a home. Matt explains that a limited 203K is for minor cosmetic repairs and there is a cap at $25,000 of the repaired value. Matt also says that because the limited 203K requires less documentation more lenders offer this but Matt offers the 203K and has seen people take as much as $100k for renovations. Holly asks what the exclusions are on the loans and Matt says that you cannot get an in-ground pool or a built in barbecue with the money from the loan.
Holly asks Matt to share what options someone has if they are not going to live in the home. Matt says that they use a Fannie Mae HomeStyle Renovation loan which is a conventional loan and the minimum amount required as a down payment is 15% but Matt suggests to put down 20% because mortgage insurance is really expensive on investment properties. The downpayment comes from the price of the property plus the cost of repairs.
Matt says that he doesn’t deal a lot with flippers because if the house is flipped and sold within 6 months lenders get heavily penalized. Holly adds that with hard money lenders do not have as many parameters and guidelines as loans that are provided by the government. Hard money lenders look at debt to income ratio, where the income is coming from and they are willing to give money much easier and quicker than the loans that Matt offers.
Matt details how the programs that he utilizes works. The loans offer a contingency reserve which means that whatever the cost of the renovation they will lend an additional 10% because often times money runs out when doing renovations and sometimes a little extra is needed. He also says that another great thing about this program is that it is fund controlled. Matt says that with both FHA and conventional you can work in 6 months of mortgage payments so that you can “skip” 6 months of payments.
Holly and Matt discuss the contingency reserve a little more in terms of using it when a project is nearing completion. For example if the buyer had the reserve remaining and wanted to upgrade the flooring from laminate to hard wood you can use the loan to help offset the cost of the upgrade. Holly asks if you can use the money for energy efficient renovations. Being in California energy efficiency is something a lot of investors look into. Holly asks if this loan covers changes like solar panels and Matt explains that solar paneling is covered by this program.
Holly and Matt discuss the expected time of this type of loan because of the amount of documentation that goes into It because you are dealing with more parties; such as contractors. Matt says that these types of loans take a bit longer because of the reports and revisions that go into it; this loan takes 75 days which is significantly longer than typical hard money loans. Holly advises people who might be interested in this program to not be discouraged by the length it takes for the loan to process because the benefits that the program offers are great and you can take great advantage of.
Matt says that the biggest difference between this program and a hard money loan is that here is no seed money for this loan. The loan will not pay out until the job has been completed. Matt says that he has seen unpaid invoices be sent in so that the buyer can eliminate out of pocket expenses.
Holly and Matt suggest that if this program is one that you are interested in you need to interview who you are working with extensively to make sure that the lender you are working with knows the ins and outs of the loans that you want to use. Matt says that referrals are the best way to find lenders who know how these programs.
to the FHA 203k worksheet, it is for owner-occupied transactions.
for the link to search the FHA loan limits nationwide.
If you are interested in learning more from Matt you can call or email him with your questions (949) 238-6035 or email [email protected]