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 two years. Holly asks Matt to compare for listeners the possible different scenarios. Matt says these programs are great for those who want to minimize their down payment and to have a better alternative than a hard money loan. He explains that renovation loans will save you about half the money in interest that you would normally pay with a hard money loan. According to Matt, renovation loans are applicable to both FHA and conventional purchases. He gives the example that a buyer who is going to live in the house would only have to put down 3.5% of the total cost of the house with an FHA loan. Holly adds that with hard money loans, 2 points are usually added to them which means that renovation loans definitely will save over half of the interest expense on the loan.
Holly asks Matt to share what the rules are on the amount of money a person can borrow 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 has seen people take as much as $100k for renovations. When asked about exclusions on the loans, Matt explains that you cannot add an in-ground pool or a built-in barbecue with the money from the loan.
Holly asks Matt about options a buyer has if they are not going to live in the home. In that case, Matt points out that a Fannie Mae HomeStyle Renovation loan can be used, which is a conventional loan with a minimum down payment of 15%. However, Matt suggests putting down 20% because mortgage insurance is really expensive on investment properties. The down payment is determined by 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 six months, lenders be 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 and where the income is coming from, and they are willing to give money more easily and quickly 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% in case the renovation expenses are more than planned. He also says that another great thing about this program is that it is "fund controlled." Matt says that with both FHA and conventional loans, you can work in six months of mortgage payments so that you can “skip” six 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 hardwood, the loan could be used to help offset the cost of the upgrade. Holly asks if the money can be used for energy efficient renovations. 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 it does.
Holly and Matt discuss the expected time needed for this type of loan. More documentation is required because parties such as contractors are involved. These types of loans take a bit longer because of the reports and revisions are involved, typically requiring75 days for approval, which is significantly longer than typical hard money loans. Holly advises people to not be discouraged by the length of the processing time for a renovation loan because the benefits that the program offers are great.
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 should interview the lender extensively to make sure that they know 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.
If you are interested in learning more from Matt, you can call or email him with your questions (949) 238-6035 or email Matt@MattCady.com
For the free download this week you will find a worksheet that Matt has put together about loans for you to learn and utilize in your real estate journey. You can find this download at www.HardHatHolly.com/52