Buying a house that needs repair is often very challenging, because lenders won't lend the money to buy the house until the repairs are done, and the repairs can't be completed until the house has been bought. Also, in today's quirky market, getting home improvement money from a bank or lending source if one already owns the home is near impossible because banks and lenders are only issuing (approved) home equity or standalone second loans up to 85%, sometimes 90% of the properties current market value, and even if such a loan is made, the rates and terms are daunting, thereby putting such loans out of reach for most homeowners. Credit card companies are reducing people's limits, always changing their terms and are not viable options for home improvements. Not to mention, who can or wants to borrow megabucks on a credit card?
The Office of Housing and Urban Development's (HUD) 203(k) program can help you with this challenge and allow you to purchase or refinance a property PLUS include the cost of making the repairs and improvements. The FHA insured 203(k) loan is provided through approved mortgage lenders. It is available only to approved people who intend to occupy the home. Multi-family properties and mixed-use properties also may qualify, under certain conditions.
The down payment or equity requirement is 2.25%.
In short, the 203(k) loan includes the following steps:
- A potential home buyer finds a home and executes a sales contract after doing a feasibility analysis of the property with their Realtor and chosen contractor(s). The contract should be contingent upon the borrower's 203(k) loan approval. Also, the seller needs to allow visits from a HUD consultant & contractor to analyze the cost estimate and extent of work needed and or wanted.
- The home buyer then selects an FHA-approved 203(k) lender or broker and arranges for a detailed report showing the scope and type(s) of work to be done, including an itemized cost estimate on each repair or improvement of the project.
- An appraisal is ordered to determine the as is value as well as the value of the property after renovation.
- If the borrower is approved, the loan closes for an amount that will cover the purchase or refinance cost of the property, the improvement costs and all allowable closing costs, which is generally about 3% of the loan amount. The amount of the loan will also include a contingency reserve of 10% to 20% of the total remodeling costs and is used to cover any extra work not included in the original proposal. Any unused funds from this reserve account at work completion are used to pay down the loan balance.
- At the closing, the seller of the property (or the homeowner's current lender, in the case of a refinance) gets paid off and the remaining monies are put into an escrow account to pay for the repairs and upgrades during the rehab period.
- The mortgage repayment and construction begin right after the loan closes. The borrower can choose to have up to 6 mortgage payments (principal, interest, taxes and insurance) put into the cost of rehabilitation if the property is not going to be or cannot be occupied during the improvement process, but it can't exceed the length of time it is estimated to complete the improvements.
- Escrowed funds are disbursed to the contractor during the construction through a series of HUD-approved draw requests for completed work. To ensure completion of the job, ten percent of each draw is held back; this money is paid after the lender determines there will be no liens on the property.
If you're a homeowner or prospective buyer of a "fixer upper" and you are seeking home improvement money, you should strongly consider exploiting this resource. Note: self employed applicants are extremely difficult to qualify due to their absence of declared net income. These are fully documented loans only, no "stated income" or "ALT-A" home improvement loans like this exist, unfortunately.
If you are a home improvement specialist that is losing jobs because of the demise of homeowner equity and a lack of homeowner payment options, you really should read up on this a bit more. If you are a Realtor who knows of fixer upper properties, you also should research this a bit more. It's what the market right now is starving for!
As always, I'm here to help!
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