100% Financing on Investment Properties

The Texas 2-Step is the perfect solution for many individuals seeking to acquire a property needing significant repairs or remodeling.

Although Retiro Financial offers the FHA 401K, Fannie Mae Home Style, and Freddie Mac renovation loans for this type of transaction, our proprietary Texas-2-Step will typically result in far superior financing terms and will often permit a buyer to avoid mortgage insurance without a 20% down-payment or cash-outlay.

That’s because the FHA, Fannie Mae, and Freddie Mac programs use the cost of acquisition and improvements to determine the maximum loan amount and loan-to-value ratio. The Retiro Financial Texas-2-Step will utilize the appraised value of the renovated property.

Let’s look at an example to illustrate this difference.

Let’s assume you’re a potential homebuyer seeking to purchase a primary residence in a neighborhood where remodeled homes sell at a premium. You found a property that needs significant remodeling. You can acquire this property for $200,000 in its current condition. It needs $50,000 of repairs and remodeling. In its current condition, the appraised value is $200,000. But when remodeled it would appraised for $290,000. This is a very common scenario.

With the agency renovation loans, the deemed value is the cost of acquisition plus the cost of improvements. Thus, to avoid mortgage insurance, you’d be limited to a loan amount of $200,000 (80% of $250,000) and your total cash outlay would be $50,000. Yet with the Texas-2-Step the value is the value with improvements ($290,000) and you can borrow up to $232,000 (80% of $290,000) without PMI, requiring a cash outlay of $18,000, instead of $50,000.

For that reason, the Texas-2-Step is also beneficial to investors seeking to purchase properties with a cash-outlay of less than the 20% to 25% that is typically required on conforming investor purchase transactions. An investor could utilize our example in the preceding paragraph to purchase a property, without PMI, with a cash-outlay (down-payment) of less of 7.2% of the transaction amount. This type of property, acquired below value, is ideal for an investor. Because it is acquired below value, during periods of low interest rates the property will typically cash-flow immediately, despite having nominal equity.

The Texas-2-Step is a fantastic program, designed to reduce the cash required to purchase a property with lower financing costs than on other standard FHA, Fannie Mae and Freddie Mac programs that include financing improvements. And, of course, it’s only available at Retiro Financial.

This program results in superior financing terms and a lower rate than FHA 401K and Fannie Mae , .

On qualifying properties, it has a lower cash outlay requirement than either the one time close or a traditional construction to perm. And for borrowers having difficulty qualifying with the alternatives offered by our competitors due to credit scores or debt to income ratios, the Texas 2-Step improves the borrower's chances for getting the loan approved.

It's a hybrid of the traditional two-close construction perm!

This program has the advantages of a traditional two-closing construction to perm transaction with more-flexible underwriting and superior permanent mortgage rates. The process works much like the traditional two-closing process with the same three phases and two separate closings.

But we solved the problem with the traditional construction to perm that typically requires the borrower to bring 20% or more to closing on the interim loan. For properties that will appraise for more than the cost of land acquisition and construction we can lend up to 100% of the project cost and if it appraises for enough we can even roll in the closing costs.

Here's an example: Buddy's brother worked for a home builder who was willing to cut 15% off what the builder typically charged for construction. Buddy was able to get a good deal on the land too. He acquired the land for $50,000 and with the reduced cost of construction was able to do the construction of the home for $150,000. Total project cost of $200,000. But because of the deals he got, the property appraised, subject to completion of improvements, for $250,000.

Most banks and lenders would require Buddy to put somewhere between $20,000 and $40,000 into the deal. The best one time close he could find was willing to do 90% of the $200,000 (a loan of $190,000). But at this 90% loan to value ratio Buddy would have to have private mortgage insurance. That added $45 per month to his mortgage payment. And he was going to need $20,000 plus another $7,000 in closing costs to get the deal closed. That was more than Buddy could come up with.

Never fear. Retiro Financial to the rescue! We arranged the financing for the full $200,000. That because we based the loan amount on the appraised value. We ignored the project cost. It was irrelevant on this program. And because we consider this scenario to be an 80% loan to value, there was no mortgage insurance required. The Texas 2-Step for Investors is the perfect solution for investors seeking to purchase residential rental properties for investment without making the typical 20% to 25% down-payment required by most banks and mortgage companies that provide rental property financing.

This investor loan program is not available on just any property, however. It is best suited for properties that due to poor property condition cannot be financed with traditional agency financing options. It is best suited for properties that are typically sold to cash-buyers, and therefore, are available at a discount.

This type of property will require repairs and remodeling to achieve its maximum income potential.

The Texas 2-Step for Investment Transactions provides the financing to acquire the property and to complete the repairs and/or renovation required on the property, including foundation, roof and flooring. These properties will typically appraise for significantly more than the amount spent for acquisition and improvements.

Let’s look at an example to illustrate how the program works. Let’s assume you’re a potential investor wanting to purchase a rental property. You found a property that needs foundation repairs, a new roof and cosmetic updates. You can acquire this property for $200,000 in its current condition. It needs $50,000 of repairs and remodeling. After the repairs and renovation, the property will appraise for $290,000 and rent for about $2,750 per month. This is a very common scenario.

Typically, you’d have to have sufficient liquidity to pay $200,000 in cash for this property as it would not be eligible in its current condition for permanent financing. You might be able to get a remodeling and repair loan from a local bank for the repairs. But it would be at a much higher interest rate than a purchase-money investor loan. And many banks won’t lend in a second lien position to investors. If you have a excellent relationship with a bank, you might be able to borrower 80% of the $250,000 need to acquire the property and complete the repairs and renovation. But you still would be out of pocket $50,000 at a minimum as the bank is not likely to lend more than $200,000 on this transaction.

The Texas-2-Step is custom made for this type of transaction. We will provide two-phase financing. Your maximum loan amount on both the interim and the permanent loan is 80% of the $290,000 value of the renovated property. Thus, you’d be able to borrow $232,000. Your total cash outlay to acquire the property, valued at $290,000 is $18,000 plus costs. You actually be able to acquire three properties with only slightly more than the same amount of cash as you’d spend on more traditional financing the single property.

There are other advantages to this type of transaction. Because the property is valued at $290,000 rather than the $250,000 you paid for acquisition and improvements, the property will rent for significantly more than had you merely purchased a $250,000 property. This means your cash-flow is immediately better than it would be under a more traditional transaction with less cash-outlay.

All things considered, Retiro Financial’s Texas 2-Step, for qualifying properties, is the best way to finance an investment property. It’s limits the investor’s cash outlay and improves cash-flow from the first day the property is placed in service. And the Texas 2-Step is only available at Retiro Financial.

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