Mar. 7th, 2010

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Recently, we have been experiencing one of the "joys" of home ownership. We have noticed that the roof has developed a few leaks, and there are serious waves in the roof in a few areas that need to be fixed. One of the leaks is over the front porch, which is not that bad, except that the moisture has gotten into the planks of the porch floor, causing them to swell and begin to buckle. One of the other leaks is coming down inside the exterior wall between the laundry room and the covered deck, and I have not torn into it to find out what needs fixing yet.

So, we get to put a new roof on this 1920's Victorian Cottage of ours this spring. (There goes our tax return) We love the house and the neighborhood though, so it's is somewhat of a labor of love.

Speaking of the neighborhood, one of our resolutions this year has been to go on daily walks (well, mostly daily) as a way to get more exercise. Luckily, our neighborhood has sidewalks, (gotta love living in an old streetcar suburb), so it makes it easy to do. We also enjoy seeing the houses in the neighborhood as we walk.

On a recent walk, we grabbed a flier from a house down the street that was for sale to see what they were asking. The price was good (roughly what we paid for this one) and I was amazed to see that what I thought was a 1 family house actually had 3 apartments in it. Two of the three are rented, and the income from the two units is more than the mortgage would be.

I have been considering refinancing this house, so I knew what the banks say we can afford, and knew that we should be able to swing approval of a second, investment mortgage on the place down the street. So I talked to a mortgage broker with experience in investments that was recommended to me by a Realtor friend.

The money required at closing on an investment is higher, which although a bit difficult, could be worked out, however there was one major deal breaker. Because we were not going to be living in the house ourselves, we would have to show proof of liquid reserve assets equal to or greater than 6 months worth of mortgage payments for both the investment property and our current house.

This works out to needing to have in ready cash over $26,000 at closing on a $90,000 property. I don't think so! So, we are going to pass on this opportunity, even though it is an excellent one, and will make someone a tidy profit.

The discussion with the broker was not all bad though, as we also discussed the refinance options on this place, as well as the renovations we are considering. It turns out that we do not qualify for a standard refinance (at a lower rate) with money out for renovations based on equity in the house, as we do not have enough equity built up to qualify.

What we DO qualify for however is an FHA 203(k) loan. This is a HUD program that essentially offers FHA insurance on a purchased home based not upon the purchase cost, but rather upon the purchase cost plus the cost of renovations, so long as the house will be worth the higher mortgage (or more) after the work is done. This is also available for refinancing existing homes.

Now, our current house is a 2 (technically 3) bedroom 1 bath, story and a half cottage. The story and a half references the fact that there is a large attic room with a window, complete with some sloped walls, but not a true 2nd floor, thus, story and a half. The attic room is not considered part of the square footage of the house as it is not heated or cooled. There is also attic space to either side of the room that can be converted into additional rooms.

We have discussed the possibility of converting the attic space into livable space in the past, and have a rough idea of what we want to do with it. The renovation will add two bedrooms, a large closet and one full bathroom to the house, plus a bonus room sitting area.

With the 203(k) program, we can get the renovations financed, and at a lower interest rate than we are currently paying. We will be paying a little more, but we will go from having very little equity to having around 20% equity in the house. This will make the house more sellable in the event we have to move, as well as giving us a nice profit from the increased equity. Even if we don't move, it will let us get stuff done we want to get done on the house, and make this great house even better!

Since we only have one opportunity to get everything done at once, we will also include other improvements to the house that we want done, such as opening the fireplaces back up and restoring them, as well as the repairs to the wall at the laundry room and a few other miscellaneous items, to include energy efficiency modifications.

The one downfall to this is that we have a maximum of 6 months to complete it all. With my working full time, I can not honestly commit to doing the work myself, even though it would allow us to have even more equity in the house after it was done. (They make you get a loan equal to the cost of having a contractor perform the work, but if you do the work yourself, they will only disburse the cost of materials, and the balance will be applied to the principle at the end.)

Our first step for this will consist of developing a work write-up and cost estimate. They recommend a homeowner having a professional do this as it saves time. Lucky for me, I am a professional, and can get our cost estimator at work to double check my work. ;-)

This write up will be used to determine the construction budget which will be added to the purchase price / refinanced mortgage amount and combined with a comparable property report from a Realtor to form the Preliminary Feasibility Analysis the banks and HUD use to determine if it is a good loan to make.

Once HUD / the banks do everything, the loan officer starts putting things together. Along with the financial aspects typical for a mortgage / refinance, they also require a complete set of architectural exhibits showing the scope of work. This is better known as Construction Documents. Again, HUD strongly suggests that the homeowner hires someone to do this, and yet again, I will be able to accomplish this part myself. :-)

I plan to document the process here, from the development of the feasibility study to developing the plans, through to completion of construction.

Stay tuned!


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tnrkitect - Musings of an Unconventional Mind

June 2011


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