Texas Remodel Financing
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. Our 30 year fixed-rate loan was a full .375 better than the competition with the same closing costs. Bottom line, Buddy was able to get the whole thing done with less than $7,000 out of pocket and his monthly payment without the mortgage insurance payment and the lower rate was $7 less than the payment on the one time close despite having a loan amount that was $20,000 more.
The key to this scenario was, of course, the fact that the property appraised for significantly more than what it cost Buddy to build the home. But even with less dramatic differences in value Retiro Financial's superior permanent loan pricing will usually make the Texas 2-Step the better choice.
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