Home buying can be a nerve-wracking experience. You sift through multiple properties, visit the ones that grab your interest, and then finally decide on your dream home — but there's just one problem: it's a fixer-upper desperately in need of some TLC. That dilemma is not uncommon today. Perhaps the home was treated poorly by a long string of renters, the owner ignored a serious problem or key fixtures were even sold off. Whatever the case, don't be shocked or overly disappointed. Increasingly, home buyers are faced with the prospect of buying a fixer-upper in today's real estate market.
Often, attractively priced properties that are foreclosure sales can sometimes come with cosmetic problems that may seem huge. It is not uncommon for a homebuyer to walk through a foreclosed home and discover that the kitchen was gutted by the former owners who sold off not only the appliances, but the cabinetry to boot.
This can even turn into a real problem that could hamper obtaining financing because often missing fixtures such as toilets and sinks can render the house "unlivable" per code. Who wants to buy a home they legally cannot inhabit?
Fortunately, there's a government loan program available that can help you with that fixer-upper you wish to purchase. The Federal Housing Administration created the 203(k) loan specifically to help homebuyers rehabilitate homes they wish to purchase to live in, but that are in disrepair. A 203(k) loan lets a qualified borrower not only finance the purchase price of the home, but also include the price of the necessary repairs to the home.
A Closer Look
Again, the goal is for the buyer to live in the home, so this is not for investors. So the types of properties that qualify for the loan are:
* Single-family dwellings up to units that house no more than four families * The residential portion of a mixed-use property (i.e., a property that is both commercial and residential in nature) * An existing construction that has been finished for at least one year * A home that will be torn down, but where the foundation will still remain * A home that will be moved to a new foundation * FHA-approved condos
There are two types of 203(k) loans, and the one that is right for your intended property depends on how much work needs to be done.
In terms of amount, a streamlined 203(k) provides up to $35,000 that can be added to the loan to cover the improvements, in addition to the purchase price of the home. For a standard 203(k), the homeowner can borrow the purchase price of the home, plus the price of the improvements, up to 110 percent of the home's expected value after the improvements. (And again, this is assuming you can qualify for the total loan amount.) The money for the improvements is actually put into an escrow account that is used to pay for materials and the parties being contracted to do the work to the home.
Time is an important element of 203(k) loans. You must start construction within 30 days of the close of the loan and your work must be completed within six months. This might leave you wondering: what do you do if the house isn't habitable? With a standard 203(k), you may be able to finance up to six months' mortgage payments so that you can afford to live somewhere else while the construction is in progress.
Another critical time element is the paperwork. FHA rehab loans can take longer to close with a lender that doesn't have experience with them, because there is more paperwork. So to avoid those sorts of delays, make sure you work with a lending professional that is experienced with 203(k) loans.
What kind of improvements are covered? 203(k) loans support a broad range of rehab work, including painting; room additions and second story additions; decks and patios; grading and drainage; bathroom and kitchen remodels; finished attics and basements; structural changes and repairs; environmental rehab such as removing lead paint or making energy conservation improvements; roofing; flooring; and accessibility upgrades for disabled residents. But what's not covered are major luxury upgrades, such as a swimming pool or hot tub. That said, when upgrading your bathroom, for instance, you might be able to install a whirlpool bath tub. Again, the key is to speak with an experienced 203(k) lender that is well-versed in the details of the program.
Ultimately, what does a 203(k) loan mean for you? Freedom. The freedom to choose the home that is perfect for you and that you love, even if it needs some work that you would otherwise not be able to finance. If you or anyone you know is currently home shopping, but some of the properties you're finding need some attention, I would love to help you review your financing options. Please contact me at the information provided on this message — and happy hunting!
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