Financing a new home renovation - Project Loans?

tinanFebruary 11, 2012

My husband and I have put in an offer on a bank owned property. The home is structurally good but the owners were filthy and smoked in the home for years - has a popcorn ceiling which the smoke has soaked into and had a dog who soiled the carpet. This is a 2 bed/2 bath townhouse. The bathtubs are all stained. Minimally the carpet needs to come out, possibly some subfloor replacement, put in laminate or other budget conscious hard floor (pets and allergies), popcorn ceiling removed, everything including ceilings primed and painted and some bathroom replacements.

We estimate that the renovations to make it habitable will be about $25,000.

We looked into home renovation mortgages, but the interest rates are nearly double what we can get on a conventional 5-1 ARM and closing costs are higher due to fees. We have a 5% down payment we can't do 20% so a HELOC is not possible.

We are considering financing the purchase with a conventional mortgage and then financing the renovation with a Home Depot or Lowes Project loan. The interest rate for the project loan would be higher than the reno mortgage, but the amount needed would be less than 1/10 of the price of the home purchase so it would be paid off faster and result in less interest cost than the home reno loans paying higher rate on the entire post-reno home value.

Has anyone used either Home Depot or Lowes project loans (you can pay their contracts with it and buy supplies). Any feedback on them or other options to look into?

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If you only have a 5% down payment, I think it is unwise to buy a house that needs $25000 in renovations to be habitable. Being that close to the edge, I would not want to buy a house that required me to take risks to make it habitable In that situation I would be more inclined to buy a house that is already in good condition and that was more marketable.

    Bookmark   February 11, 2012 at 9:56PM
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Is this a townhouse involving any homeowner's assoc? IF so, what is their feeling, rules or???? Just curious. Also being a bank owned, how long will the escrow take, and will you get a clear title. $25,000 is not much so you may want to get additional estimates and don't forget to check with your local building dept for permits. How is the electic and plumbing? Will you be living there or reselling or renting? Is this attached to another townhouse, if so, what about the neighbors?
Just a few things to check on.

    Bookmark   February 11, 2012 at 9:57PM
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We only have 5% down because we are selling our current home, we have a good income and even with 2 mortgages we are not overdoing it. If our current home doesn't sell we will rent it out, it's a condo in desirable location and easy to rent - but it will certainly sell.

This is actually a condo not a townhome technically but an end unit with no one above, below or to one side so in that way it feels more like a townhome. The comps for this property are about twice the list price of this home, it is in a desirable neighborhood and this area is a market not hit much by any slump and already regaining momentum.

We're not asking for advice on our personal financial decisions or the wisdom of purchasing this home -we have all the details and we're convinced that it is an excellent investment as well as being a great place for us to live for a few years - so close to work for both of us.

We have not had a home inspection yet as our offer has not been accepted yet, so we don't have the full details on plumbing electric etc but all the fixtures work and the faucets and toilets etc work.

This will be our second condo purchase so we are very familiar with HOAs what to look for etc. We don't need guidance there.

$25k is not very much in the context of the california housing market, LOL and the property post-reno will be worth more than an additional $25k. We will be able to repay the renovation costs within months of buying, it's just the time frame of down payment, closing costs, moving costs and overlapping mortgages etc that will not allow us to free up the cash to do the basic renovations before we move in.

This is an REO not a short sale, close of escrow will be very fast.

What I would like input on is the Home Depot and Lowes Project loan or other similar line of credit type home renovation financing (credit union personal LofC?). Have you used them, how were the contractors (you have to use theirs) etc etc.

    Bookmark   February 11, 2012 at 10:54PM
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Have you really investigated all that might be needed to remove the cigarette/smoke damage? You might never be able to get rid of it completely unless you gut the place.

OP said: "$25k is not very much in the context of the california housing market, LOL"

Don't LOL too quickly. I'm in a desirable top-school town in Los Angeles and $25K doesn't go too far in renovation cost. Property is down a bit in my area, but contractors aren't charging less and materials have gone up.

    Bookmark   February 12, 2012 at 1:21PM
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