notes on process: getting a mortgage

Posted: July 4th, 2013 | Author: | Filed under: financing | No Comments »

Real talk. Right now we’re (unfortunately) obsessing about the mortgage. We need to get a mortgage for this house. We dreamed up this scheme, together with my parents, in October of 2009: We all fell in love with this big old house, and it seemed like a pretty amazing bargain, a once-in-a-lifetime opportunity, and an exciting fixer-upper-project that we could do together, but the house was in such a state of disrepair that no bank would offer a mortgage for it. The sale was cash-only. So we decided together that they would borrow against the equity on their own home to get the cash, and buy this house in cash. We would do the renovations, and once we got the house fixed up enough to qualify for a mortgage, we would buy it from them, paying them back for the purchase plus whatever we need to borrow for the cost of renovations. So that’s what we need to do now!

Of course it’s turned out a little more complicated than we expected. We had a decent idea about what goes into renovating an old house, but we didn’t know a whole lot about the mortgage market. We are lucky enough to have good credit, and enough income to buy this cruddy old house, so unlike most prospective house-buyers, that’s not the hard part for us. It’s the house! Turns out the bank doesn’t just want to see a decent roof, strong bones, and solid foundation. They want to see neatly finished walls and floors and ceilings, everything freshly painted, all the cracked shingles replaced, all the bumpy floor-boards evened out, trim and molding on everything. No peeling paint or chipped corners. They want everything gussied up and tidied up and cleaned up and neatly squared away.

As best I understand it, the reason the bank wants everything to look tidy and perfect, is because we live in the age of short sales and foreclosures and third-party lenders and secondary mortgage markets. Local banks no longer own mortgages, because it’s a risk they can’t afford to take. Our local bank would give us a mortgage, and then immediately sell the debt to a third-party lender who would “own” that debt until it’s paid off. That third-party lender would probably be a giant national lender with a pretty strict set of requirements for what kind of properties they will or won’t get involved with. So mortgage requirements are pretty much standardized across the nation and not really open to negotiation, no matter how nice and friendly our local bank might be. From here forward, “The Bank” refers to these standards, I don’t think it really matters which bank we talk to, as far as we can tell it’s all the same. (Short political commentary: this whole system is so f*ed that I don’t even know where to begin and I wish I didn’t have to deal with all this foolishness, but I do.) Anyway, The Bank doesn’t really know us and they don’t know whether we’ll honor our mortgage or whether we’ll maybe lose our jobs and go bankrupt or something. Then The Bank would be stuck with ownership of our house, and they’d want to sell it again, ASAP (which is referred to as “the secondary market”), so they want houses that look good and easy to sell and then re-sell again if necessary. If the house doesn’t look like it’s going to be sellable, then they don’t want anything to do with it. (This is a little silly because of course we could always just take out a mortgage and buy a beautiful house and then have a hundred wild parties and wreck everything and then default on our loan and leave them with a ruined house, but that seems to be beside the point.) Banks don’t want to give a mortgage for a house unless it looks neat and tidy and ready to sell to anybody and then re-sell again to anybody else. They are looking for ready-made houses with mass appeal.

I haven’t missed the irony here: If not for the housing crash, we never could’ve found such a cheap house! So we’re grateful for the cheap house, but bummed about how those same circumstances have made it so difficult to get a mortgage.

We’ve heard a lot about construction loans or renovation loans or 230k FHA loans. Those seem like cool mythical things where supposedly a bank would give you money to pay for the renovations that you’re going to do, and then you do the renovations and everyone lives happily ever after. As far as we can tell, those things existed before the 2008 real-estate crash, and they do not exist anymore. If anybody’s gotten one since 2008, let me know how you did it. When we’ve talked to banks about this, they’ve told us that construction loans were a cool idea, but once the homeowners got the loan they didn’t always complete construction, and then they didn’t always pay back the loan. Or they used the funds to hire contractors, and then the contractors took the money and skipped town. Either way, the banks ended up owning houses that were foreclosed, unfinished renovation projects, they couldn’t find buyers who wanted to buy unfinished projects, and then the real estate market crashed and all those unfinished houses were worthless and became financial burdens, and they didn’t like it, and they won’t do that anymore. We get a lot of advice from really well-meaning folks who suggest that we get a construction loan, but we’ve found 0 banks that want to offer us (or anyone!) a construction loan.

And another fun fact about construction loans: you can’t do the work yourself. Even when banks did give construction loans, homeowners weren’t allowed to fix it up themselves; they had to hire licensed contractors to do all the work. Which means that the cost of work is a lot higher, which means that a construction loan, if we could get one, would leave us with greater debt. We’re really happy to hire some experts to help us with some of this work, but luckily we’ve been able to do a bunch of the work ourselves, and we wouldn’t really want it any other way.

So anyway, it seems like the reality of the situation is that we need to turn this house into a very neat and tidy house with mass appeal for the secondary mortgage market. Which sounds great, but it’s a stricter set of standards than we had imagined, and it’s different from our personal priorities, so it’s honestly more work than we expected, on a tighter timeline, and it kind of changes the nature of the project.

Personally, I would love to focus on some purely functional stuff, like improving our heating system and insulation. I don’t want this whole entire huge house to be warm and toasty through the winter (that would be wasteful!), but I would like to isolate a core zone of kitchen and livingroom and bathroom, add some brand-new radiators, and tighten up and insulate these rooms enough that we can easily keep them toasty warm with a minimal amount of fuel.

I would like to focus on a few rooms of the house and make them nice and comfy and beautiful, and then maybe move on to gardening and landscaping. I would happily leave the rest of the house looking shabby for a while. I don’t mind renovating the rest of the house one room at a time and spreading it out over the next 10 years. Gut each room to the studs and clean out all the crud inside the walls and insulate it properly and thoroughly, update the heating system one room at a time, and do the whole job at a relaxed pace, and do it properly and thoroughly. That’s what I would love to do.

But we’d planned to buy back the house from my parents within a few years, so that’s what we want to do, even though it means we’re swapping The Bank’s renovation priorities for our own. My parents are super nice and not breathing down our neck about the deadline but we want to honor that commitment. Also, we feel like once we get the mortgage out of the way, then we will be able to do this project at our own pace, on our own terms, and that’s what we want.

So instead of doing everything perfectly and lovingly and slowly, we’ve kind of switched over to doing the work as fast as we can, a bit more superficially, and just trying to make everything look as neat and tidy as possible.

We’re still thinking of this as a long-term project. But we’ve got a short-term goal. Maybe it means that we’ll end up doing some of the work now, quickly, and then re-doing it later, properly.

The positive side is that we’ll end up with a nice-looking house, a fresh coat of paint on everything, and honestly a pressing deadline is a great motivation to get a lot of important work done fast. So this year we’re trying to set aside distractions, make some compromises when it comes to all the other parts of our lives, and just focus on getting a lot of the house stuff finished up.

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