Is it better to pay cash for a house outright then get a home improvement loan or to get a 203K loan?

Asked by vrivasburden, Chicago, IL Mon Jun 11, 2012

I can pay 25,000 for a house cash and have found a few where I want but it is a fixer upper that will probably need and additional 20,000 for repairs, should I just do a consolidated type loan for part of the mortgage and all of the repairs or pay for the house outright and then get a home improvement loan for 20,000

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Mon Jun 11, 2012
You'll get two different answers asking a Realtor and a loan officer. Obviously you've seen the one side, now consider the other...

If you're planning on living in the house, we have to consider the state's high cost lending law that basically says if the fees on your loan exceed 5% (applicable to owner-occupied REFI's but not purchases), you've just issued a high cost loan. Lenders+title companies+appraisers would have to cut their fees to be able to originate a sufficiently small loan and at a certain point, the fees can't be cut anymore and you have a situation where it's nearly impossible to close on a financed transaction. You'll run into one of two things, lenders who have a minimum loan amount (this is generally the deal killer) and then others who don't but then have the issue with the high cost rule.

It'd behoove you to carefully weigh the pros and cons before making a decision. There are many homeowners out there that own homes they can't rehab because they went the purchase-and-worry-about-it-later route.

A rehab loan (203k/HomeStyle/HomePath renovation) is a great option if you can get the seller to agree to a 45-day close. I've done them in less than 30 days but the stars need to align for this to happen usually (borrowers and contractors usually can't get their docs together in two business days) so I always recommend 45-day closes. If your option is to buy+roll your rehab into one loan up front or potentially lose the deal, you may want to consider potentially losing it if you're not in a financially strong position to rehab it with your own funds post close or not willing to use hard money. Speaking of hard money, there's always this route but not every homebuyer is comfortable with this though it's not hard to find a referral to a reputable hard money source if you want one.

If you're buying an investment property with cash and want to do a financed rehab post-close, make sure you you get pre-approved for the rehab loan ahead of time or you may find yourself in a predicament. Also consider that post-close, you'll have seasoning to contend with so you can't use the new appraised value in most cases until one year has passed so don't plan on pulling all your cash back out immediately after close.

That's a summary from my last presentation, there's more to it (there always is) but that should give you a good base from the lending side of things to help you make a sound decision.

Best of luck!
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1 vote
I checked with my compliance department and they looked into this more for me, the 5% cap also applies to purchases but there are other overlays a/the state have that create these situations. Bottom line, be aware of how you're going to get dry before jumping into the ice water (polar bear club reference--I'm from Alaska :).
Flag Thu Jul 12, 2012
Sorry for the post spam guys, I finally figured out my posts were truncated because I tried to use the "bracket" to say "less than" instead of typing it out, it thought I was making a HTML comment and deletes it.
Flag Mon Jun 11, 2012
Bill J Delig…, Agent, Naperville, IL
Mon Jun 11, 2012
Keep in mind that it may be difficult to finance many of these properties. Secure the property by paying Cash and the obtain a loan later for the rehab. This will be less expensive for you.
2 votes
Darrell D. D…, Agent, Schertz, TX
Mon Jun 11, 2012
1st, is this a home you want to live in or is this an investment property. If you are going to live in it, I would speak with a local lender about options.

If this is an investment property, I would consider using other peoples money via a hard money loan or bridge loan. I don't know lenders in the area you live, but the concept is all the same. If you want info on a bridge loan, here is a great link:…

Good luck!
1 vote
Philip Sencer, Agent, Chicago, IL
Mon Jun 11, 2012
If you have the cash do it. 203K loans have lots of paperwork and deadlines to deal with and you are at the mercy of others.
0 votes
Matt Laricy, Agent, Chicago, IL
Mon Jun 11, 2012
Its whatever makes the most sense for you financially speaking. If you think you can swing paying cash and shooting for a loan, go a head. If not, try for the 203k loan.
0 votes
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