Expert: liznarr - 6/8/2009

Question
My mother died almost three years ago and left her Augusta, Ga. home to her four children, of which I am the youngest.  the estate went through probate and we were each listed as owners on a deed of assent. (the house was paid off years ago and has no liens on it).
My siblings all own homes and wanted to sell the house.  My husband and I were living (and renting)in Atlanta at the time, but decided we would like to move to Augusta and buy the house from my siblings. Unfortunately we did not have sufficient credit at the time (no bad credit, just very little).  We moved into the house 21 months ago and have been paying $375.00 a month in rent to the siblings, which they split three ways, while we worked on establishing work history in Augusta and building up our credit.  We are now ready to try to buy out the siblings, (and they are ready to get the money) but aren't sure the best way to go about doing so.
About the house: It needs work; needs all new windows, new gutters, has wood rot on the back of the house and has asbestos siding.
On the tax bill the house is listed as being worth $50,000.
The siblings have agreed that they will be content to get $10,000 each out of the deal.
My husband and I don't make a lot of money (I am currently staying home with a new baby), but work hard, have always paid our bills, and rent, on time and live within our means.
My husband and I approached a bank and consulted one of the  mortgage specialist about the best route to take on this.  We were told that the best thing to do is a cash- out refinance.  However, when we told them about the repairs the house needed they said the house would most likely not pass their appraisal (no one has actually been out to look at the house) and that we would need to make the  repairs first.  She suggested we get a home improvement loan, make the repairs and then begin the refinance process. We are in the process of applying for a home improvement loan now, but still aren't sure if this is the best way to go.    
My question is this: Is this the really the best route?  If I already own 1/4 of the home can't I use that as equity and get a loan to pay off the siblings now, (one of them, especially is really in need of the money) and then do the repairs afterwards?  No one at the bank seems to be able to answer my questions.  do I need to consult a lawyer rather than a bank?  Any advise would be greatly appreciated.

Answer
Hi Dee,

What you need is money to finance this house, so I doubt that a lawyer would be able to help you any more than a good lender.

I don’t understand your mortgage specialist telling you the best route for you is a cash-out refinance, when you stated there is no mortgage on the property.  You might have used the wrong terminology, but you cannot cash out and refinance a mortgage that does not exist.

I understand that your siblings each have a 25% interest in the property, but I would be very cautious about getting a home improvement loan on a house that you do not yet own and making repairs before you do own it.  Would your siblings willing to all co-sign for the improvements?

One option available to you is an FHA 203K loan -- for homes in need of repairs.  A very simple explanation of the way this loan works is that an appraiser appraises the house in as-is condition; and also appraises the house after “x” repairs are made.  

At closing, the as-is amount is paid.  The difference in the as-is amount and the appraisal amount of AFTER repairs are made is the amount you would receive AFTER closing in the form of draws to pay contractors for repairs.  You need to get all your estimates in place PRIOR to getting such a loan so that you are not subjected to a lot of surprises in the form of increased repair costs after obtaining a 203K loan.  Make sure that any estimates you obtain state that the pricing is good for “x” period of time --  again, so you know exactly what you will be dealing with and do not have unexpected pricing increases for the work.  If you decide to take advantage of a 203K loan, all you need do is find a lender who does FHA loans.  Here is a link to the FHA site which explains 203K loans:
http://nhl.gov/offices/hsg/sfh/203k/203kabou.cfm

If the lender you spoke with did not mention an FHA 203K loan, perhaps she does not do FHA loans (not all lenders do).  The underwriting requirements for an FHA loan are also not as stringent as a typical Conventional loan.

To answer your question on your equity in the home, yes, most lenders would consider your current 25% ownership interest as instant equity in the home.  As I read your question, all you need is $30,000 to pay each of your siblings $10,000, and the house is listed on the tax records as having a value of $50,000.  Based on the tax value of $50,000, you already have a $12,500 interest in the home (25%).  Add to that $30,000 what you will pay your siblings, and the total is now $42,500 -- $7,500 less than the $50,000 value.  As I see it, going into a loan, you already have a $20,000 interest in the home ($12,500 plus $7,500).  

Tax values in my area are (95% of the time) LOWER than the actual value of a home, so hopefully this will be the case in your area and the house will appraise higher than $50,000.

When you do make concrete decisions about your financing, make sure you have a properly drawn-up Contract of Sale with your siblings, stating that they will each agree to take $10,000 at closing.

Just a suggestion, but you mentioned that the house has asbestos siding.  There is nothing wrong with asbestos siding on the exterior of home as long as it is in good condition and not “all broken up.”   Asbestos is toxic when it is AIRBORNE -- when airborne particles can be ingested into someone’s lungs (i.e., when asbestos is broken into smaller pieces).  For example, if some of the asbestos shingles on this house were broken up, only in that instance should there be any danger.  There are laws in place that must be followed when asbestos is removed.  If the asbestos siding is in good condition, I think you would be wise to spend your money on other things at first, and cover the asbestos later with, say, vinyl siding, if you just do not like the look of asbestos siding.  My Mother has lived in an asbestos-sided house for over 50 years, and she LOVES it and has NEVER had any problems with it.

If the mortgage specialist you spoke with does not do FHA 203K loans, find a lender who does.  Even if you find out that she does do 203K loans, if she did not previously mention this to you, I would certainly shop around for lenders before I made a decision.

I have clients who just moved to SC from Augusta, and they used SunTrust Bank in Augusta.  Check with Chris Halliday there.  If he does not do FHA 203K loans, perhaps he might recommend someone who does – or at least give you some suggestions.  In my dealings with him, I found him to be very honest and upfront in all our discussions.  Feel free to use my name if you want to.

I hope the above is helpful to you.  Good luck to you, and feel free to write again if you have additional questions.

Regards,
Elizabeth