Construction Home Loans and Rent-to-Own Fixer Upper Houses

by William B. from Union City, Georgia

Ask Kate about construction home loans and rent-to-own fixer upper houses: When home buyers and sellers enter into rent-to-own contracts, they set the price of the home upfront even though the transaction often won't close for several years. The seller benefits from getting a long-term renter vested in the condition of the home. The buyer benefits from locking in today's price of real estate. But the home William purchased this way is a fixer upper. So, he asks how he can get a permanent mortgage that includes cash for repairs and remodeling.


Ask Kate: How Do I Mortgage Rent-to-Own Fixer Upper Houses

By William B. from Union City, Georgia

Construction Home Loans and Rent-to-Own Fixer Upper Houses
Kate,

Two years ago in July, my wife and I purchased a home for $50,000 on lease purchase in Union City, Georgia from a friend from church.

The house was her father's and was in fair condition. But so far we have put approximately $40,000 into it to get it looking good on the inside. We still have not done anything on the outside of the house.

There are some issues that we will have to take care of after we close. This house is 60 years old and the trees near the driveway have cracked it up badly and it will need replaced.

We would like to get out extra cash from the house to finish the repairs and find a good and honest mortgage company that will work with us.

Thank You for Your Advice,
Bill

PS Maybe we can hire you to get us through this?

Ask Kate at Get-Your-Best-Mortgage-Rate.com
Kate's Answer: Construction Home Loans and Rent-to-Own Fixer Upper Houses

Hi Bill,

First of all, thank you for your trust in me.

While I appreciate it greatly, I am no longer originating mortgages which would be necessary in order to directly assist you during the loan process.

Along those lines, I recommend running your rent-to-own contract past an attorney to ensure your transaction is equally favorable to yourself, the home buyer, as well as your friend, the seller.

Due to many of the Ask Kate letters I receive, I can't tell you how often I get the itch to jump back into the fray and help mortgage borrowers one-on-one. Here's the story of how I was originally drawn to mortgage lending and why I reluctantly walked (errr, actually hobbled) away from the best job in the world.

Financing and Documenting Rent-to-Own Fixer Upper Houses


Mortgage transactions to finance a home on a lease purchase (another way to describe rent-to-own) can be tricky, depending on the lender's guidelines and how your contract was structured. So here are some ways to preserve and increase your existing cash.

Ask the lender to apply a portion of each month's rent that is over and above the local market rents toward your down payment. If the lender will cooperate, you'll most likely be required to provide copies of the contract and cancelled rent checks to verify your payments. A hassle for sure but this will keep more of your existing cash in your current bank account to apply to future repairs and remodeling.

Include documentation of the $40,000 (receipts to show cost of goods and bank statements to show your payments) that you've already spent repairing the home. This will become especially beneficial if the lender decides to turn your rent-to-own purchase transaction into a refinance.

You can also negotiate with the seller to pay your allowable closing costs, as permitted by guidelines.

Construction Home Loans for Fixer Upper Homes


Shop for a lender who is experienced in construction loans. If you could get permanent financing that would roll in the cost of repairs and remodeling, how good would that be!

The now defunct Washington Mutual was the reigning monarch of these mini construction loans which featured cash to the home buyer to remodel kitchens and bathrooms at a competitive interest rate after funding. Brush up on the different types of construction loans at Residential Construction Loans Explained: Short-Term and All-in-One Financing Options.

FHA has a similar program, albeit with more red tape, called the 203k for fixer upper houses. Read about the program at FHA 203k Rehab Loan.

I mention these various options because, although you'd think lenders would readily offer them, you might need to jog their memories regarding these programs. As a preventative measure, be sure to also read Cautionary Cash-Out Mortgage Refinancing Tip before deciding on the size of the loan amount.

How to Find a Good and Honest Mortgage Company


How to find a good and honest mortgage company, you ask? Well, that IS the million dollar question. First, here's what NOT to do!

Please do not choose a lender based solely on the lowest quoted mortgage rate. See why at Compare Mortgage Lenders to Avoid Borrower Remorse. Then follow the links to more help on my site.

I also recommend gathering and researching lender referrals before making a choice. See more at How to Find FHA (and Conventional) Mortgage Lenders with Proven Track Histories.

More on Fixer Upper Houses

Do you know how to determine the age of fixer upper houses? It may be as easy as using the lowly toilet! Using the toilet? Ummm, I clarify at... Fixer Upper Houses: Unique Tips for Buying a Home.

Best wishes,
Ask Kate

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Another Question on Lease Purchase
by: Bill B. from Union City, Georgia

Should we have our attorney draw up the NEW purchase agreement showing the date we have been leasing it from June 1, 2014? We want to get some cash over and above to fix some large ticket items after we close and show ONLY the increased price of the house on the contract, and at closing our attorney will disperse the checks?

The owner is OK with this but will it hurt her by us getting more on her taxes and is there a way around this for her? We are wanting to close no later than August?

Can you also suggest a good and honest mortgage company in Atlanta, Ga. area.

Hi Bill, Kate here...

While my website offers mortgage information, I am not knowledgeable on legal and tax matters. I highly recommend getting an attorney well-versed in real estate and taxes for specific info to your transaction.

Along the same lines, I give tips to help with how to shop for mortgage lenders. But because there is no possible way for me to stay up-to-date with lender qualifications across the nation, I do not refer borrowers to lenders.

But here are Six Tips to Shopping for Mortgage Lenders.

Best wishes, Kate

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You can also ask Kate about your mortgage at Ask Kate About Buying a House.

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