When I heard the house was piled full of dolls I was intrigued. But when I heard about the zombie spiders, I knew my family had found our home.
After a long search, my wife Amber and I thought we had found a house in the Hudson Valley that would be a good home for us and for our children, ages 3 and 1, for decades to come. It needed a ton of renovations, from plumbing to new electrical to a new kitchen and plenty of paint, the idea of a house full of dolls was eerie, and there were creepy crawlies in the basement that had met a sad end because of fungus — which made them even creepier.
On the other hand, there was no bidding war and it didn’t blow our budget. It seemed like the pieces fit.
Until they didn’t. We were very close to closing when our mortgage lender, a big national company that had given us a quick pre-approval, appraised the property and told us they wouldn’t approve us for a conventional loan. They explained that the house needed too much work.
“The lender won’t lend on a home that has health and safety items or if it isn’t functional,” I was told.
I was blindsided. I had assumed the renovations wouldn’t be an issue for our lender because we intended to pay for them ourselves. I should’ve done more homework, and I also wish some of the people we were working with had informed us this might happen. Here’s what was going on.
Working with the lender
Our lender wanted us to take out a home renovation loan for both the purchase price of the house and the vital renovations. In a lot of ways, that sounded appealing. We haven’t renovated a house before, and we would have been paired with a consultant who would have helped us identify any health and safety problems.
The consultant would have inspected the house after every step to make sure it was done properly. The house needs extensive work, and as amateurs we would have appreciated having access to and guidance from an experienced professional.
Why didn’t we want to do that? First and foremost, because we didn’t want to borrow money when we felt we had the funds on hand. The renovation loan had a slightly higher rate than a conventional mortgage and those percentage points and dollar would add up.
Second, the process sounded far slower. The consultant would have had to approve every repair before it could begin, and the repeated inspections of the house would have cost money. Third, we weren’t sure how much veto power this person might exercise over our plans. How collaborative was the process going to be?
But before we got to that point, I was told that getting approved for the renovation loan was going to take another 45 to 60 days, and possibly longer. We’d outbid others for the house, but not by a lot. I felt sure that if we told the seller we needed two more months to get financing, they would reconnect with another bidder and we’d lose the house.
How to look for new financing
If I’d been smarter, perhaps I would have cast a wider net when I started looking for a mortgage in the first place instead of being grateful that one company quickly offered us a loan. Now I needed to explore a bunch of different options, and needed to do it fast.
I put out a call on social media for help, and also got advice from my friend James, an editor for the real estate publication HousingWire. We agreed that a mortgage broker was my best option because they would be able to shop around and contact more lenders than I could reach on my own in the moments between my work and parenting responsibilities.
What we couldn’t do was get a broker to return my calls and emails. They might have done a better job than I could, but I couldn’t wait around.
James and I decided that I should ask a variety of lenders: Big and small, online and brick and mortar, local and not. Since I’d already applied for one mortgage, I had our tax documents and everything else already in hand. There was no reason not to at least start the process several times and see if anyone was helpful.
I have low expectations when asking the internet for advice, but it came through with a few good suggestions. I wound up speaking with about half a dozen lenders. Most agreed with our original lender: Getting a conventional mortgage was going to be hard.
“No one wants to just lend you money on a broken house,” one told me.
It was very frustrating, but I understood the lenders’ point of view. They had to consider the risk we’d default, and if that happened, they would end up owning a house that wasn’t worth what they’d lent us. It also might not sell for very much without expensive repairs they would have to pay for.
The conversations I had with most of the lenders were preliminary and they didn’t ask for much information other than how much I wanted to borrow and how much work we expected to do on the house. If more of them had been willing to lend, I would have let a couple of them run a credit check as part of the process.
That’s somewhat risky because having multiple credit pulls is bad for your
. But my credit is good, and if it wasn’t already clear, I was pretty desperate.
After a week or two of calls, two options emerged.
The outside option
James connected me with a hard money lender, a
financing company that could give me a high-interest loan and could do it very fast. I spent the rest of that week talking to two of them. They both me it clear their loans are mostly for house flippers.
One lender told me that we qualified for a “fix and flip”-style loan because we didn’t plan to move into the house for more than 60 days after closing. The other, when I mentioned that we were buying the house as a home and not an investment, said “I can’t know that.”
He meant he would pretend I hadn’t told him I wasn’t going to flip the house and that might be willing to give me the loan knowing that we didn’t really qualify for it. I kept talking to him because I felt I didn’t have any options, but that was a huge red flag.
The two lenders ultimately offered similar terms: A one-year all-interest loan at a very high rate of about 9%. The interest would be charged based on our withdrawals from the loan amount. That was worrisome, but the bigger problem was the “all-interest” part. We would never repay any principle.
Instead, we would pay interest on what we’d withdrawn — meaning if we borrowed $100,000 and spent it all, the final monthly payment would be $9,000 — and after the year was up, we would still owe $100,000 after paying thousands and thousands in interest.
The only way to repay the lender in full was to get a conventional mortgage on our fixed-up house at the end of the process. But when we did that, we might have been forced to borrow even more money because we wouldn’t have as much left over for a
With both the lower-rate renovation loan and this hard money loan, the borrower needs to refinance after a year. That presented another problem because interest rates are going up. There was a good chance mortgage rates would be higher when we refinanced and our payments get bigger, and refinancing itself can cost thousands of dollars in fees.
It’s possible to see why this could work for a house flipper, or even for someone who expects a windfall over the next year. But it was obviously a risky move. If this had been our only option, we might have done it because zombie spiders and all, we really thought this was a great house for us. But it would have been very difficult to make the math work.
A big, national lender had turned us down, and a smaller, Hudson Valley-based one was flexible enough to understand our needs. Their loan originator asked the most basic imaginable questions, like “Does it have electricity?” and “Does it have a kitchen?”
The answer to both was yes. It’s a kitchen under the loosest definition imaginable; there’s a sink and some countertops and cabinets but the fridge and oven are long gone. I answered in full and didn’t hide anything, and he said we might have a chance.
The appraiser, who was assigned to the property at random and not chosen by the lender or by me, agreed that the house was — technically! — livable, even if no one with sense would want to live in a house that needed this much work. And with that, we were pre-approved.
By this time I still expected the sale to fall apart any day, but even though there were a few more delays, it never did. We finally closed on July 1 and we’re free to turn our minds to fixing up this house.
The seller asked if we wanted the dolls and we politely declined. Hopefully they are all long gone and none are lying in wait for us. If they or the zombie spiders in the basement get me, at least I’ll know it’s because I successfully navigated the housing market.