If you wish to buy a house that needs a great deal of repairs (in other words, a fixer-upper) and you do not have the funds at your disposal to do so then you can find yourself caught in a real conundrum. Your financial institution is not going to be very eager to extend home improvement loans to you until all of the work is done but on the other hand the work cannot be done until you are able to buy the house. This is a catch-22 that is bound to aggravate even the most peaceful and patient soul!
The solution to your problem is HUD’s 203(k) Rehabilitation Program. Under this program you are able to buy or refinance a house and included in the mortgage is the cost required to make repairs and/or do upgrades to the property. This FHA insured 203(k) loan can be obtained through approved mortgage lenders throughout the country. It is open to be to those wishing to become homeowners who plan to reside at the property in question.
To be eligible for the 203(k) loan the owner/occupant is required to put down a down payment of roughly 3.5 percent of the acquisition and expected repair expenses for the dwelling.
What to Do
The steps involved in securing a 203(k) loan are as follows:
- Find a home in need of repair that you wish to purchase and then set up a sales contract after a feasibility analysis of the property has been completed with a real estate agent. The contract that is drawn up will be contingent on the approval of the loan and based upon the required improvements that need to be made and are deemed as such by the mortgage lender and/or the FHA.
- The potential home-buyer then needs to choose an FHA-approved 203(k) lender. From there arrangements must be made for a detailed proposal to be drawn up of the required work that needs to be done. The proposal must include a cost estimate for each repair that is required to be made.
- An appraisal is then completed. It is done to determine how much the property will be valued at following the repairs and renovation work.
- The borrower is required to pass the credit worthiness test of the lender’s. If he or she passes the test then the finance loan will close at the price needed to purchase or refinance the property as well as to repair it. The loan amount will also include a contingency reserve of 10 to 20 percent of the total for the remodeling expenses. This reserve is in place to cover any additional work that may need to take place that was not included in the initial proposal.
- At the closing of the sale the seller of the property receives his or her money and the funds that are left over are placed into an escrow account to pay for all of the repairs that the fixer-upper needs to be inhabitable.
- Once the loan has closed the mortgage payments begin to be due and the remodeling phase can then get underway. The homeowner can make the decision to have up to a maximum of six mortgage payments (PITI) put into the cost of rehabilitating the property if he or she does not plan to reside there while the construction is underway. However it cannot exceed the anticipated time span that it takes to complete the repair project.
- The funds held in escrow are released to the homeowner during the remodeling/repair phase by way of a series of draw requests for work that has been done. To ensure that every stage of the project has been completed properly 10 percent of each draw is held back. The money is given out once the borrower lets the lender know that the work is finished. The lender then must ensure that there are no liens on the property. Once that is done then everything can proceed from there.
If you are interested in the 203(k) Rehabilitation Program then check the 203(k) Lenders List to find a lender in your community. It can be found on the web. Please note that the interest rate as well as the discount points on the loan is something that can be negotiated between the borrower and the lender. They are not written in stone as there is room for discussion.
