Delayed Financing: How it All Worked Out
THE RAVENNA HOUSE Back in October we bought the Ravenna House for cash. You can read more about it here but basically we coupled our own savings with family loans to come up with an offer for $270,000. There were 10 other cash offers submitted in one week, but by some miracle, the owner selected ours. A couple weeks later, we owned the house.
It had been our intent all along to take out a mortgage on the property within the first six months. A process our mortgage broker called delayed financing. We'd apply for a traditional 30-year loan and when we closed, the bank would essentially cut us a check for $270,000. At that point we could repay the family loans and still have a little left over to cover some of the extensive renovations. We planned on finishing the basement, redoing the kitchen and bathroom, updating the electrical and plumbing, adding a furnace, and the list goes on.
So here we are, just about six months later. How did it all turn out?
Well let's start with the renovations. They aren't done. Not even close. But we've made a ton of progress. Do you even remember what this place used to look like? Well here are some before and after photos to help jog your memory...
Looking a lot better, right? I can hardly even remember the cat pee smell or those carpets or the pink bathroom. Or even a time when Wilder didn't sleep in that bedroom. It's come that far. The kitchen and upstairs bath are pretty much done (I think that's your first glimpse of the renovated bathroom - I'll share more on that space soon, I promise!), the hardwood floors are refinished, the electrical and plumbing are updated, and the basement is drywalled. All in all, I'd say we're about 70% done with this house renovation. Maybe more if you ask me on a sunny day.
So I better warn you that the rest of this post is kind of technical. But I think it's important to give you a pretty clear understanding of the financing process and explain how everything worked out for us. If you make it to the end, I promise you'll know a whole lot more about delayed financing then I did six months ago!
So what about delayed financing? Well it has been a real learning experience for us. It wasn't something we were familiar with nor was our mortgage broker. We found that delayed financing has more limitations than a traditional mortgage. Like a timeline and value limits and documentation. Here's a list of the basic delayed financing rules (more info here and here):
- Loan value must not exceed property's original purchase price
- Loan must be secured within 6 months of original purchase date
- Original purchase funds must be documented to bank -we needed copies of the checks or deposits showing where our family funds came from and personal loan documents showing interest rates and other loan terms.
- No liens can exist on the property
- Original transaction must be arms-length - i.e. no relationship between the buyer and seller
- Loan to value must be greater than 80% and some times as much as 70% - for us it was only 80%
None of these rules turned out to be a major issue for us. We had always planned to finance within 6 months and were happy to keep our loan at $270,000. Our original funds were well documented in the form of personal loan papers drawn up by yours truly and formalized with signatures. No liens existed on the property so no problem there and we had never met the seller until the day we first toured the house.
Sounds simply, right?
Well it wasn't all sunny skies and clear roads. We ran up against a few hurdles in seeking bank financing. Chief among them, we had to get the property value up. But let me lay the hurtles out in a list. Here it is, our obstacles in obtaining delayed financing:
- Our appraisal value needed to come in at $337,500. The delayed financing rules stipulate that you can only mortgage the amount you initially paid for the property. For us, that was $270,000. But to get a loan for $270,000, that amount had to be 80% of the property value. Meaning our property needed to be appraised at $337,500. We decided to delay the appraisal until the end of March to give us as much time as possible to work on the property. As I showed you earlier, we were 95% done with the upstairs and the basement was drywalled but unfortunately no paint, flooring, or plumbing fixtures were installed downstairs, nor were the exterior improvements (fence, patio, rebuild garage) even started. Still the appraisal value came in above $337,500. Phew! Actually it came in well above that. $420,000. Meaning our loan to value was more like 65%. That also meant that we had increased the value of the Ravenna House $150,000 in six months of working nights and weekends.
- A heating system needed to be installed and working - We needed a working heat source in order for the property to be considered habitable and thus bank-loan-able. we went back and forth on how to heat the house, but ended up just hiring out a furnace install. They had it installed and the ducting run within a week. Cost us about $5,500.
- The loan had to be secured within 6 months - this meant we had to get enough work done to reach our necessary appraisal value within 5 months. That gave us 1 extra month to get the loan processed. As I mentioned above this wasn't a problem (the value came in well above where it needed to be), but it definitely kept us motivated. And according to our broker, if we didn't close on the loan within 6 months, then we'd have to wait until 1 year to seek financing.
With the appraisal value in and our 6 month window nearing an end, it was time to get the broker all of our documents. I'm sure this part of the process is different for every delayed financing deal, but for us, this meant standard loan documentation such as tax documents, bank statements, and pay stubs but also the personal financing documentation, copies of checks and deposits of personal loans, a year worth of investment account balances showing no other private financing was given to us, and notarized personal guarantees of primary residence. The broker also required us to write an addendum to our personal loan documents showing each lender agreed to the amount of interest we owed. And we would have to wire the loan repayment to each of our family lenders at the time of closing.
Our quest to secure a delayed financing mortgage actually stretched out over a couple months as we worked with our broker. But the majority of those documents were required near the end of the process. As the broker delved further into the loan and then involved the underwriter, more documents were requested. Our closing date was pushed. And then pushed again. It was finally scheduled for last week.
After the delays and the extra documents, I was half expecting for a major setback at closing. More documents needed? Collateral in the form of our first born son? A wildebeest invasion? Well obviously not the third, but I wasn't going to rule out anything else.
But it turned out that closing really was sunny skies and clear roads. Our loan closed without a hitch last week. Forty-five minutes of signing every single letter in my name approximately one billion times and the house was ours. Again.
We've repaid all of the personal loans with interest. Now we just need to finish the renovations. On our schedule.
And that's it. Our whole experience seeking delayed financing on the Ravenna House. You made it. Phew!
p.s. Thinking these need to make a regular rotation in our Sunday morning brunches. Garrett, are you reading this?
p.p.s. I'm a little obsessed - okay a lot - with these tiles!
p.p.p.s. This house puts a whole new meaning in the term "small footprint". It's just 84 square feet!