If You Give a House a Roof…

It’s going to want a paint job.

Houses are Greedy Little Things, Aren't They?
Houses are Greedy Little Things, Aren’t They?

Or, it will if the current paint job is peeling and you’re going for an FHA renovation loan.

Welcome to buy-a-house limbo; but I may be getting ahead of myself.

At the last update we’d decided to pursue the renovation loan, but were planning to stay with the conventional loan for the better terms, etc. I keep saying plan like that means anything. Here’s what the process has looked like so far:

Plan A: Make an offer almost $10K below listing price, get a (potentially) great fixer-upper for an amazing price, fix it up over time at our own pace.
Plan B: Ask seller to replace the roof as it’s pretty much FUBAR as far as roofs go. (No go.)
Plan C: Reduce our offer another $10K and ask for closing costs to more accurately roll the cost of a new roof into what we originally were willing to pay for the house. (They weren’t thrilled with that idea, either.)
Plan D: Offer to raise our offer to “split” the cost of the new roof, as long as they put it on before closing. (This never got offered–they were adamant about as-is.)
Plan E: Stick with our original offer and seek a Conventional Renovation Loan with lowest-bidding roofer. (But said roofer couldn’t agree to do the job without some money up-front, and conventional doesn’t allow that.)
Plan F: Stick with our original offer and seek a Conventional Renovation Loan with a slightly higher-bidding roofer. (Only, he never got back to me after I sent him the contractor packet from the bank.)
Plan G: Switch to an FHA 203(k) Streamlined Renovation Loan to go back to the lower-bidding roofer so he can get 35% of his fee up-front.

And while, yes, there is theoretically a Plan H, I don’t even know if it’s feasible or what it would entail. That’s a lot of plans in less than a month, no?

The other up-side to going FHA (despite the PMI–Private Mortgage Insurance–and additional front-loaded interest) is that it reduced the minimum down-payment. While going conventional is always ideal, the total renovation cost on top of the planned down-payment was eating away at our buffer for that “squeak zone” we knew we’d have. It’s a short-term value, true, but we’re still looking at a mortgage that’s slightly over half our current rent for twice the house (and the ability to accrue equity). There was an unintended consequence of switching to an FHA loan, though: the FHA-level inspection!

By the way, for a Renovation Loan, the “Total Cost of Renovation” is more than just the contractor’s bid. Here’s how my loan consultant broke it down for me (fees as estimated by Wells Fargo, January 2014–just in case someone finds this list on a search, later):

  1. Contractor’s Bid
  2. 10% Contingency Fund (which gets applied to the principal if there’s anything unused at the end of the renovations)
  3. Feasibility Study ($430 Conventional, $600 FHA–though we were able to skip this because we’re doing a Streamlined Reno; i.e. under $30K)
  4. Inspection Fee (~$200, though you may need to allow for multiple inspections, costing more, depending on the scope of the renovation)
  5. Final Title Inspection (~$150)
  6. Draw Center Fee (between $350 and $750, and covers the department handling the disbursements for the renovation loan)

Acknowledging that this could have been 100% my misunderstanding, I was under the distinct impression that with a Conventional Renovation Loan, we could choose to just replace the roof and still handle the rest of the needed improvements on our own, over time–like I said, I’m no longer sure that was the case, but it was the theory we’d been operating on. Because the FHA requires homes they back to meet certain health and safety standards, things like peeling paint and others will be noted as part of the appraisal. And (the other shoe dropping on this front) anything on the appraiser’s report MUST be included in the scope of the work the contractor is providing. The seller can’t fix them, and neither can we: the contractor has to do it.

Consider that my ohshit! moment at the end of the hour-long application call. Cue my freak-out of what the appraiser might deem necessary and how much that might push up the renovation costs. If the total cost of renovations goes above $30K, we can  no longer do the streamlined reno-loan (not to mention it would be pushing up into price discomfort area, and we’d have to consider–again–walking away). Plus, streamlined or no, the total cost of the home + renovations cannot be more than 95% of the projected home appraisal (value after needed repairs). That’s a lot of ifs, buts, and maybes–hence the limbo period we’re in until the appraisal comes in and our contractor is validated/gets us an updated estimate.

After my initial freak-out, though, I started to look at the additional renovations as a good thing (provided we can swing the deal at all): the items most likely to be on the appraiser’s report are the things we’d most likely consider triage-worthy on our own, repairs and improvements we’d be trying to make immediately after putting up the down-payment and closing costs when money would likely be tight. While financing some of these things might not be ideal, they would give us more breathing room as far as major systems go. (I still don’t completely see how peeling paint is a safety issue if the paint isn’t lead-based, but whatever…)

And speaking of paint: did you know that peeling paint will prevent you from getting home owner’s insurance with many companies? And if not that, the fact that your home has an open crawl space higher than 2-feet will exclude you from others–even if the company already insures the home in its current state!

If I thought getting roofing estimates was ridiculous, the hunt for an insurance policy/agent was maddening!

Perhaps I was too honest (though most policies require an eyes-on inspection of the property, and omitting details will get said policy swiftly canceled), but most places I called wouldn’t quote the home while it was under renovation. Then there were the aforementioned crawlspace and roof issues, plus the lack of smoke detectors (seriously, the previous folks took them with them as we can clearly see where they used to be). Meanwhile, our loan consultant was adamant that we just choose an agent and she’d be able to get the insurer to understand the type of policy (Builder’s Risk) we’d need and get it smoothed over.

Our heads have been spinning!
Our heads have been spinning!

But how could I pick an agent when I couldn’t even get a quote to decide who was going to be able to offer us a decent rate?! The most common situation involved not being able to get insurance until the roof was replaced, but we can’t replace the roof until we buy the home, but we can’t buy the home until we get insurance on it–maddening I tell you!

Finally, I got one agent to quote me a Fire-1 policy through Foremost (a subsidiary of Farmers who seems to take the properties Farmers won’t), only it would only be good while the home was unoccupied–Foremost can’t write policies for occupied homes in the state of Georgia. (And the policy was going to cost almost $2K for that dubious privilege.) Finally, one local agent that couldn’t help us directly referred me to a former coworker who now works for Farm Bureau and can write policies through the state-sponsored insurer–aka the last resort of the property-damned.

She could at least quote us a Rehab policy that was only a quarter of Foremost’s Fire-1 option (before adding contents, at least), and explained that–at least in Georgia–you can’t have 2 policies on the same home (unlike the earlier direction to get HOI plus a Builder’s Risk rider or whatever). Either way we’d be converting the policy from rehab to full coverage, but this might be the lesser of the two faint options we had. Especially considering we have to pre-pay the first year’s coverage (even though we’ll be changing the policy one the work is done and moving in) and bring 2-3 months of the next year’s premium as cushion for the escrow account; essentially pre-paying 15 months. (And, no, that wasn’t how it used to be, this is apparently something that’s changed in the last few years.)

But, hey, at least I had my options–few though they were–and I felt a little better about naming our agent as part of the application process. As of the end of last week our application had been sent to underwriting for initial review, and we’ve received our conditional approval. The past week of waiting, even with the assurance that the loan “looks good” on paper by our consultant, has kept me from spending too much time planning for our new home. I’m wary of getting my hopes up with the appraisal findings still an unknown, and the contractor rebid on top of that.

Buying a house is a lot of hoops to jump through, we knew that. It just feels like the hoops are flaming and I’ve got lead weights tied to my feet! Still, a friend reminded me of a quote from The Last Lecture:

The brick walls are there for a reason. The brick walls are not there to keep us out; the brick walls are there to give us a chance to show how badly we want something. The brick walls are there to stop the people who don’t want it badly enough. They are there to stop the other people!

This is us showing how badly we want this house!

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