Buying my grandparents house - need mortgate advice
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Hello. My wife and I are going to buy my grandparents house. They are giving us a really good deal on it, so the plan is to do some major remodeling over the next few years, inside and outside.
We had our initial visit at a financial services office recently. They lady was very helpful and seemed very knowledgable. We told her about our immediate plans of renovating the the kitchen completely. She recommended that we apply for more money than what we are purchasing the house for, give that total check amount to my grandparents, and then have them turn right around and give us the extra money back so we can use it to remodel with. She recommended that before we sign all the paperwork to get the load application started we should get a contractor to come out and give us an estimate.
Fast forward a week: We are in a bit of a rush as my grandparents just found out they can move into their new rental place August 1st and I want to get this completed as soon as possible for their sake. I called the lady back today and told her of the rush and that maybe we can simply ask for an additional $25,000 which I think would be more than enough to renovate the kitchen. She basically frowned upon that because she is worried that our renovation would possibly cost more and then put us in a jam and she really wants us to get a contractor out there for an estimate before we officially apply for the mortgage (which will take more time)
I’m looking for advice. Also, is her way of doing this even legal/ethical? If this is not a good way to proceed, how hard would it be to apply for a second remodeling loan soon after we purchase the house?
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First, the lady was right in advising you to get an estimate. In fact, I would advise that you get at least two estimates. If it were me, I’d get 3 estimates. Ask each contractor what they would charge if you decided on changes. Do you have a firm remodeling plan sketched out on paper? What would need to be removed? What needs to be moved to a different location? Are you adding or removing windows or a door? Are you making the kitchen larger? Where the support beams are located makes a huge difference in cost when you are moving all or part of a wall. Will you be moving plumbing? Where do you want the electrical connections? What type of lighting? What materials do you want for the sink and the countertops? Do you want an island? Will the flooring need to be replaced? All of that and more will help the contractor give you a knowledgable and fair estimate. If you just figure you’ll spend up to X and stop, you’ll have to make your choices based on the available amount.
Now, as to the lady’s proposal that you apply for more money than you need…I’d find another lender very quickly. It’s wrong, to begin with, and whatever lender you use will base the amount they lend you on the appraised value of the property. The lender will run through your ability to pay, then have a qualified appraiser give them a current market valuation for the property. That is what the lender will go by, and only a dishonest appraiser will add another $25,000 to the appraisal so you can get more than the property is worth, give the extra along with the purchase price to your grandparents, and then have your grandparents kick back the extra to you.
That said, if your grandparents wish to sell the property to you for X (the purchase price, which should be about the market value or a bit less so it’s not a “sweetheart deal”), and they then decide to gift you with $25,000 because you are their beloved grandchild or they wish to loan you $25,000 at current interest rates or a bit lower because you are their beloved grandchild, that might fly. Depends on whether you have other family members who might get irate that you’re getting $25,000 and they’re not.
The main thing is to be very careful to keep the purchase of the property separate from your grandparents gifting or loaning you the remodel money. The bank is investing in the property, and they expect that their loan will be for less than they could get if they foreclose and sell the property, if necessary.
As far as a remodeling loan, if you are getting a loan for less than the appraised value of the property (i.e., property valued at $200,000, purchase price is $180,00 and loan is for $150,000, somewhere along the line the lender is going to want to know where the other $30,000 of the purchase price is coming from - is it a gift from your grandparents or are they loaning you that money. Or are your grandparents selling you the property for well under market value, and why. The bank will not go along with a property valued at $200,000, purchase price is $225,000, and loan is for $225,000) The bank might easily go along with your grandparents selling you the property for $150,000 although the appraisal is $200,000, and they then loan you an additional $25,000 for remodeling purposes since you would have $50,000 in equity in the property because you paid a lot less than the appraised value.
Talk with an attorney, talk with other lenders. it is entirely possible you could obtain a remodeling loan if you will have some equity in the property after closing, depending on how the initial purchase is structured.
I am not an attorney or a loan officer or involved with any lender. I have worked for title companies as a mobile notary public for some 24 years and have dealt with lenders, title companies and borrowers, talking with loan officers and with borrowers at the table, and I do my best to stay informed about the industry.