Exception to the 20% rule?

[NuggetBrain]

Okay, so I have an opportunity that's presented itself that I really want to take advantage of. My mom is selling her house because she wants to downsize and has given me first dibs on it. She's selling it to us for what she owes on it rather than what its worth (which is more); it needs a TON of cosmetic work but structurally it's fine. We are looking at doing a 203k renovation loan and have a little more than the 3.5% that's needed for the down payment and my mom said she'd take care of closing costs. Anyways, here's the numbers below - is this an acceptable exception to the 20% rule? My mom isn't willing to wait for us to get 20% down because she REALLY wants to get out from under the house (she is thinking of moving to California or Florida in the next few years and wants to just rent until then). The only reason we're considering doing this is because it would be a fantastic deal, and we'd pretty much be able to update the house to make it however we want, and we both grew up in the area and have always wanted to come back to it. This would be our home until retirement (we're both 30 now) so no plans at all for flipping or moving or anything for at least the next 20 years.

House purchase price: $100,000
Down Payment: $7,000
Estimated cost to fix everything (from a contractor): $70,000 - $90,000 (depending on how high-end we want to go).
Final purchase price: $170 - $190,000
Estimated cost of home after updates: $230 - $250,000

We have $10k in debt (half on a motorcycle loan and half in student loans). We will have the motorcycle loan paid off and have an EF fund of 3-4 months saved by the time we move into the house in March. The final payment (including PMI, taxes and insurance) would be between $200 and $400 more than our rent (once again, depending on how high end we go with our renos). Affording the higher payment won't be a problem and we'll still be saving about 22% of our net income.

[bjl584]

What is your income? What is the value of your assets?

Without knowing, I have to say no, it's not a good deal for you. 3.5% down on a $190,000 loan isn't a good idea.

[NuggetBrain]

Our income is 90k, and our payments would be within the 28 to 35 percent. He has a 401k with about 40k, I don't but am starting a roth IRA that will be fully funded each year. We also save $1000 a month. This is all still doable on our new mortgage .

I guess I'm confused as to why I would need 20% down? The main reason I hear is to make sure there's equity in the home but we'd have at least 40k in equity as it stands.

[bjl584]

Our income is 90k, and our payments would be within the 28 to 35 percent. He has a 401k with about 40k, I don't but am starting a roth IRA that will be fully funded each year. We also save $1000 a month. This is all still doable on our new mortgage .

I guess I'm confused as to why I would need 20% down? The main reason I hear is to make sure there's equity in the home but we'd have at least 40k in equity as it stands.

When I bought my first home I put down 20%. Yes, it gave me instant equity, and I was never under water on it even during the housing crisis. It also allowed me to avoid PMI. Also, in the time that it took to save up the 20% downpayment (about 4 years) I really learned a lot about budgeting, saving, sacrifice, and priorities. It was a great exercise to get me ready to be a homeowner.

With 3.5% down, you are probably going FHA. Interest rates are higher and sometimes terms are shorter. You will also be paying PMI, property taxes, insurance, and maintenance and repairs. Have you accounted for this in your calculations?

Do you have any liquid savings or an EF? You will need it being a homeowner. Otherwise things will fall into disrepair, or everything that breaks will end up on a credit card.

You are within the 28 to 35% rule, but you will need 6 months cash on hand for the reasons above.

I would only say yes to this scenario if you have thought out and planned and budgeted for all of the costs and expenses that go along with owning a home AND if you have at least 6 months worth of expenses in an EF.

[LivingAlmostLarge]

Will you qualify for a mortgage? This will be a builder's loan right not traditional mortgage? Is the rate higher? What happens if you find out you need more money to fix something unexpected? Will the house carry a bigger loan?

I don't know how it works out when you get a construction loan and you aren't a builder? ima?

[NuggetBrain]

Will you qualify for a mortgage? This will be a builder's loan right not traditional mortgage? Is the rate higher? What happens if you find out you need more money to fix something unexpected? Will the house carry a bigger loan?

I don't know how it works out when you get a construction loan and you aren't a builder? ima?

This is a renovation loan, its specifically for homes that need some tlc. We would be working through a contractor and a majority of the stuff is things like painting, new carpet, new windows, etc. We got a few different quotes for the renos and met with a mortgage lender that specializes in these types of loans so we have a pretty good idea of the costs. The rate is the same as a regular 30 year fixed loan.

[skydivingchic]

A note on the budget for renovations. You need to have a budget for changes - I'd recommend ~10% of the total cost. So going off the higher number, you need to be budgeting nearly $100,000 for renovations. There will be changes. Maybe the contractor finds something that must be repaired or done differently than he originally planned, maybe you decide you want the higher end fixtures, etc. Something will come up, so budget for it now.

[MonkeyMama]

I suppose I am curious how much the home is worth before the renovations. Does it come with 20%+ equity if you go "as is"? Will improvements REALLY add that much value to the home? & I also share other people's concerns about the true cost of renovations (they always come in over budget)!

I personally agree with bjl that saving a 20% down payment is much more than just "having equity." It is good practice for dealing with the cost of home ownership. That said, I have some friends who were gifted down payments, etc. There are certainly people out there who can handle it and do just fine. You don't have to take that time and care to appreciate the advantage of a gift like that. So I am not so hung up on that part.

So basically, your mother wants to give you the gift of the home equity she has built up. I would absolutely consider taking up that offer, even without 20% down. But, am wary about the cost of renovations, etc. as mentioned. Though I think you could easily afford it on your income, I also wouldn't want to walk in to an upside down situation. That is the part that makes me think it's not such a great idea.

Would your mom just give you the cash proceeds from the sale? Or is there some emotional attachment to the house which is why the deal was made?? (Whether she gives you the home equity, or the cash - it is all the same from a gift/tax perspective. I Can't help but wonder if she just thinks there is no tax ramification to sell you the house cheaper than fair value. Either way - the gift tax thing is likely nothing to worry about. Unless she has a net worth in the millions).

Anyway, my main concern with this whole scenario is the risk of getting stuck in an upside down situation.

[photo]

Would your mother consider renting out the house to you? That might be a problem if you have siblings and with the future inheritance, but if you're an only child, it might be another option.

[MonkeyMama]

Another idea - buy the house and take the gift. Save up 20% down for renovations - later.

I think this is a wise angle because you will think much more critically about the costs if you have to save up ahead of time (a large chunk) versus just getting a blank check from the equity in the home.

[NuggetBrain]

Right now the house is worth about 150k so she's "gifting" us with the equity. But if she sells it to someone else, she'd keep the money from the sale. The loan has a 10% buffer built in, if we don't go over then that amount is put towards the principle. That 10% buffer is also included in the price of the payments we've calcluated. We have a scope of work & my husband is a drafter so he drew up blueprints of the house & we took that to a good family friend who's a realtor. He looked at comps in the area that have what we're doing & that's how he came up with the price after renos. We also looked at the last few momths of my mom's bills so we have a good idea of what those bills will be. It sounds like a lot but the cosmetic fixes we planned are fairly extensive and include a new kitchen & bathroom.

[NuggetBrain]

A 203k loan is based on what the value of the house will be after renos. So if the house will be worth 200k, they will give you a loan for the mortgage plus renovations up to a total of 200k for both combined. So they don't take into account what the house is worth now, just what it will be worth when you complete the renos in yor scope of work.

[NuggetBrain]

Photo - I have a brother.

[alphadore]

I wonder how it turned out now.