Mortgage - Unfinished Home

[dytch2220]

I came across an unfinished home that is in a nearby small gated community.  From a friend at the bank who has the property under foreclosure I believe they would accept around 85k for the home as-is.  The finished value of the home is somewhere north of 300k.  I'm a handy guy and figure I could complete a lot of the work over time and use this home as an opportunity to get a personal real estate business started.  So, the question:  What does it take to get a loan on an unfinished home?  Would I be able to take out a loan for say 150k and use the difference to get the house into liveable condition?  Pitfalls I should avoid?  Any information would be useful.  Thanks.

[Anonymous]

TO be brutally honest, getting that type of loan is very tough to get if you had great credit and had a general contractor bid out the work.  Doing the work yourself makes it even harder (and is going to require you having high FICO and decent reserves).  With sub 600 FICO scores there is just no way this will happen.  If you were over 680 midscore and were a licensed contractor, etc maybe.  But a local handyman with sub 600 FICOS has zero chances of getting a home loan right now and even less chance of getting a loan on an unfinished property. 

[dytch2220]

Thanks for the honesty!  I assure you, I have no illusions that I'd be able to get the loan right now.  The only reason I have all three FICOs is because I was turned down on financing for a standard home/loan.  I'm really just looking for information about this type of loan for the future.  It's something I'm interested in doing once I get things back on track.

[JM-AM]

You would have to prove you are capable of performing the work according to all state, county, city codes. You will have to be able to provide license for some types of work (heating, electricity, etc etc). You will have to know how much it cost to perform the work. The list and qualifications is pretty steep and your credit profile needs to be above average from what I understand.

[ShanetheMortgageMan]

Why wasn't the home completed?  That'll be a question that every lender asks.

Banks usually don't want any part in offering financing to buy & complete partially-built homes, they see them as mismanaged projects and would take too much work/due diligence to determine if everything is up to code, no pending liens from past contractors (mechanic's liens they are called), etc.  However the original lender that lent the original owner the money to start the project would probably be interested in offering financing to a well qualified individual to complete the project, as they are still on the hook with an unpaid mortgage as well and hard to sell collateral.

Ideally you would want to get a construction loan from a bank, as they would likely offer the best interest rates/terms for the mortgage.  The most common construction loan is a one-time-close, meaning the construction loan converts to a permanent fixed rate loan afterwards.  You get a variable interest rate during the construction period, and then the rate for the permanent term of the loan is determined by the market at that time.  You only need to qualify once, and you also only pay one set of closing costs.  The less preferred construction loan, but becoming increasingly more common (due to tightening of mortgage credit), is the traditional construction loan that just is for the completion of the home/requires being paid off within a short period of time after completion, and so you'd need to refinance into permanent financing afterwards, where you would pay a second set of closing costs as well as have to qualify for that refinance (so you should have that part figured out before you'd take on the initial construction loan).  Banks construction loan programs usually require great credit, low debt to income ratios, some down payment (5-20%), and assets/reserves remaining after closing.

Hard money or private money loans are usually what is used in this situation, as those types of lenders can be extremely flexible with qualifications and the logistics of construction, and are primarily concerned with equity/skin in the game so they know that the borrower isn't just going to run off but if the borrower does, they'll be able to rid themselves of the property quickly (thus the requirement for equity).  They look to make sure their borrowers have the ability to repay/make payments on the loan, the property has equity (40-50% is common these days), the borrowers have some financial interest in the transaction (you got to pay to play), and that the exit plan (selling the property/refinancing into traditional mortgage financing, etc.) is sound.