FHA 203k or Seller-Financing For Deck Repairs

[Anonymous]

Hi everyone,

I'm considering buying a home that needs major deck repairs. It's across from a very popular nature preserve, where larger homes across the street overlooking the river recently sold in the $550-685k range. This home has views of the river, is 700 ft2/small but is in decent shape and is priced at $199k (with a $7k "rebate" offered to the buyer at closing to put towards deck repairs). There is a 250 ft2 bonus room downstairs that is plumbed/wired and just needs insulation and drywall.

1) Option 1: FHA loan. Two brokers have reviewed my file (credit report, W2s, employment history, reserves) and have pre-qualified but not pre-approved me: in one case, they're waiting for my taxes to get filed, which should happen tomorrow or Monday (he is ok with me putting in an offer once he pulls my credit but needs the transcripts in the IRS system by the time we close.) The other broker hard-pulled my credit last month and wants to wait until March when I have a clean 12 months of no lates and possibly do a rapid rescore as I've paid cc utilization down to 1% since she pulled my credit.

Back to the deck: knowing that the deck's state of disrepair might cause it to fail an FHA inspection (none have been done to date) I had two licensed contractors take a look at the deck this week. The quotes were in the $20-30k range, depending on whether I want to keep all 950 ft2 of the deck or reduce the square footage to save money. Cost: $32-35/ft2. There is an alternate main entrance to the house, so one idea is to simply seal off the deck access and ask the FHA inspector to not include it in the inspection. (I understand that only the mortgage broker or LO can have dealings with the FHA inspector, so my agent advised me to make sure the broker makes this point clear to the inspector. It's in a small town so I've been told this should be feasible.)

2) Option 2: Seller finance then refinance. The seller's agent is proposing an alternative to tying up the property and risking that the deal could fall through due to a failed FHA inspection: he suggests that I propose seller financing for 60-90 days with a good down payment (he initially suggested 20% but I said that defeated the purpose of my pursuing an FHA loan for the low down payment; the then said "Just put your best foot foward and put as much down as you can."). During that period of time, I pay for the deck repairs out of pocket OR pay to tear down the deck. I then apply to refinance the home. I emailed the two mortgage brokers I've been speaking with for the past month or so to find out if this is feasible, what kind of turnaround time there is to refinance this kind of thing, and see what they thought.

3) Option 3: FHA 203k rehab loan. This is probably my favorite route, as I think Option 1 involves a big risk = convincing the inspector to ignore the falling-down deck and Option 2 is far too risky for me (why would I agree to a very short-term seller-financed note when I'm spending that time improving their property, only to risk that I can't get it refinanced??). Correct me if I'm wrong but that seems like a win-win for the seller, who had just pulled the property from the MLS until May when the buying season picks up again in this area. I also like the idea of a rehab loan as I'd love to redo the kitchen and finish-out the bonus room and bath downstairs. (I had a rental agent come look at the property and she thinks I can keep the downstairs unit 100% rented during the busy season. Minus the management fees, furnishings and maintenance, she believes renting the bottom unit would cover 50% of my entire note.)

The problem is, one of the mortgage brokers I've spoken to said he is NOT a fan of the 203k loan: he says that the interest rate and closing costs are not only higher, 403k loans take up to 90 days to close and he said that most sellers aren't willing to wait that long. However, based on what the seller's agent told me tonight, I believe a full-price offer with 90 days to close might be acceptable to the sellers, who have been unsuccessfully trying to sell this house for 121 days but can't due to the state of the deck. They also turned down 2 all-cash deals for 15-20k less than their asking price, and with either a regular FHA loan or the 203k I'd be offering them full asking price.

So that's my lengthy scenario. What do you think about the 3 options?

Thanks in advance!

[ShanetheMortgageMan]

I agree that the seller seems pretty flexible, if they are considering seller financing then I don't see why they wouldn't want to accept a longer closing period.  203k loans don't take 90 days, unless there are some very inept parties involved, but you should anticipate minimum 45 days especially if you are doing the full 203(k) rather than the streamline 203(k) as with the full 203(k) you need a an FHA 203(k) HUD consultant to get involved.  Interest rates are usually .125-.250% higher depending on the lender, fees are a little more since it involves a couple draw inspections and title updates ($500-750) and the HUD consultant fee (up to $1,300).

Unless the appraiser is corrupt, no party is going to be able to persuade them to ignore anything about the home when it comes to completing the appraisal report. 

If you go with seller financing then you legally own the home, so I wouldn't look at it as if you were fixing up a home that someone else owns.  A successful refinance afterwards would hinge on the home appraising for however much is needed, and if there is 20% equity then you could refinance into conventional financing and not have to pay any PMI (whereas you would have to pay PMI with an FHA 203(k) loan or a regular FHA 203(b) loan).  With seller financing you have to pay for the repairs out of pocket though, which is a good thing if you don't want to pay interest on it but if you don't see yourself being able to comfortably save up then financing the repairs with a 203(k) may be the better option for you.

[Anonymous]

Thanks for your reply.

I am a bit terrified of doing seller financing if it's tied to a refi within even 12 months: although the home is reasonably priced, there are few comps in this area and everything will hinge on whether it passes an appraisal. One broker I've spoken with suggested that I ask an FHA inspector to meet me at the home and give me an idea of how much work will be needed to pass an inspection. He said he walks away from 203k loans but gave me a mortgage broker who specializes in them. According to him, only 10% of 403k's he's tried to get financed successfully get mortgaged.

Update: I heard back from the mortgage broker who works in this area, who is highly recommended by the agent and contractor I spoke with: 1) she needs a 640 minimum FICO (I was at 613 a month ago but I paid down my cc utilization from 20% to 1% and some negatives will have aged past 12 months in 2 weeks...so maybe with a rapid rescore???), 2) the deck would need to either be repaired prior to close or pass appraisal due to health and safety concerns, 3) major overlays (reserves, low DTI, major bank account analysis). In sum, she said "The overlays make it difficult for anyone with your score to obtain a mortgage."

In terms of seller-financing > then getting it refinanced: the above broker said, "In order for you to refinance out of a seller financed loan loan, you would need to be on title and have owned the home with on time payments for at least 12 months." And I just don't believe the seller is willing to go 12 months.

The other option she mentioned: a hard money loan. Repair the deck during a 60-90-day seller-financed note then do a regular FHA.

[tim1017]

I would go with the 203k.  The work has to be completed by a contractor and they assign a rep to walk you through the entire process.  A lot of people use this type of loan in the real estate investment community.  Hard Money Lenders are expensive but again not an issue for investors looking to flip the property.

[Anonymous]

Does anyone know whether they're harder to qualify for? E.g., Higher FICO, higher reserves, longer period of no derogs or lates??

I don't know whether anyone with a 613 mid-score could qualify for a 203k. It seems like lender overlaps greatly vary on these loans.

[Anonymous]

Update: I submitted an offer yesterday for the house.

• 10% down
• 5% annual interest
• Interest-only payments
• 12 monthly payments then a balloon payment for the balance
• We split title search/escrow fees

Hopefully my FICO will have gone up considerably in the several months to come and then I can either refinance or get a new loan (apparently there are a few options?). While we're waiting to hear back from the seller, I thought I'd mention a few comments from the broker I had been working with, who said  the following about this deal: "If you purchase the property for a particular price and when we have the home appraised in several months, we'll go off the lesser of the Purchase Price or of the Appraised Value.  We'll go up to 97.5% of the the lesser." He then sent me this quote: "If the property has been owned by the borrower for less than 12 months, and the loan being refinanced is not an FHA loan, the LTV/CLTV is based on the lower of the appraised value or the borrower’s acquisition cost. If the borrower has owned the property for more than 12 months, the current appraised value may be used to determine the LTV/CLTV."  

Can any loan experts help me interpret this? 

He also said "There would be no limitation on how long you have owned the property.  The new loan would be treated as a Rate and Term Refinance and any cost (other than appraisal) can typically be rolled into the new loan. Generally allow 45 days to complete the new refinance."

Question 1: I read somewhere that some lenders credit your loan payments on a seller-financed note towards your downpayment when you refinance. Does this happen? If so, what can I do to structure the deal such that a lender would want to apply my payments? 

Question 2: Are there any lenders here who know of any "gotchas" regarding seller-financed loans that might negatively impact me when I approach lenders again in 10 months for a refinance?

Thanks in advance...

[Anonymous]

My agent also added in the contract that I'll be making "interest only payments".

@ShaneTheMortgageMan: does this mean that I won't be able to accrue any equity in the home during the 12 months of owner financing? I'm not sure what interest only means.

[Anonymous]

Another update:

My agent ran a title search: the seller owes $77k. I suspected somethign like that was afoot. As a result, seller-financing is impossible.

The seller's agent spoke with my agent and they propose that I "rent to own" the property while I repair my credit and apply for a bank mortgage (FHA or conventional). The seller has agreed to the following:

• 6 month escrow period. In that timeframe, I rent the property at $775/mo (that's how much the seller's mortgage note is)
• In my rental period, seller pays the taxes and insurance
• After 6 months, I get into a loan (check my credit at month 3, see what if anything needs to be remedied, and give it a few cycles to reflect in CRAs)
• Meanwhile, my agent said "we do escrow so the seller can't back out" (What does it mean to "do" escrow if you're renting to own? My agent said we'd register the sale with the title company. Does this mean it's a registered sale and he has a lien against it? So confuse...)
• The purchase agreement 1) protects my purchase price, and 2) allows me to work on the property to get it ready to pass an inspection. 
• If I do the rent-to-own agreement, it's a purchase/not a refi when I go out for financing
• During the 6 months, I have (contractually-protected) free reign to improve/alter the property as I see fit. I used to be a builder and interior designer so the seller agreed to this without issue. My priority is getting the deck repaired and bottom unit insulated/drywalled so both can pass inspection. I'll probably wait until I'm in a traditional loan to make further improvements
• The two brokers I've spoken with said they'd both like to see my scores at 620 (I was at 613 in January) so think this is actually a decent plan.
• I'm currently negotiating to have 100% of my rent payments credited back towards my purchase price. If the seller refuses, I told my agent I'd be ok with 50% credit (or even 0% if this is an absolute deal-breaker for the seller: $4650 is not a huge amount of money in the grand scheme of things but I'm not shopping for a house to pay off someone else's mortgage! Nor was the seller planning on that income.).

So there's my update. Do you experts have any insights on my questions in bold, or tips on the arrangement itself? Thanks!