Great opportunities exist in the real estate market right now.  Many homes are selling for far lower prices than they brought at their last purchase.  3-  and 4-unit properties are often available for a song due to extreme reductions in viable financing options.  But what about getting a home that is right for you?  The problem with real estate on the market right now, is that none of it is customized to your tastes.

Enter Construction and Rehab Mortgages.  These mortgage programs allow for things that regular loans do not, specifically the financing of funds to build a new home, or to repair and improve an existing one.  I should point out upfront that when talking about a new construction home, there are two types that can be considered: buyer-financed (where the end-user purchases a lot and arranges for a home to be built on it); and builder-financed, spec homes (for speculative construction, meaning the builder puts up the home hoping to find a buyer when completed).  For today, let's take a look at the different mortgage products available for buyer-financed properties. 

The construction-to-permanent mortgage is a hybrid product, and is the most common product used in building a new home.  In the past, it used to be a requirement to take out a construction mortgage during the period when a home was being built, and then refinance into an end loan when completed.  The construction-to-permanent product combines those two loans into one, saving significantly on closing costs from a second closing.  With this product, the buyer and builder will work together to ensure steady progress is made on the construction to ensure on-time completion.  This is one of only a few products that allows for construction from the ground up of a new home.

A rehabilitation mortgage, such as the Fannie Mae HomeStyle program, allows a well qualified buyer to purchase an existing home, and repair or upgrade it into satisfactory condition.  This can allow a buyer substantial leeway regarding the property, and can allow for substantial changes, for example, installing a new kitchen, changing wall locations, etc., upon purchase of a new home.  This is an excellent option to consider when buying a single-family home that is somewhat dated.

A special type of rehabilitation mortgage is available through FHA for borrowers who may not qualify for the HomeStyle program.  This program, the 203(k) mortgage, is especially useful for homebuyers considering multi-unit properties, or for homebuyers who do not qualify for conventional financing.  The 203(k) program allows for 2 different options: the streamline option requires little rehab documentation and allows for up to $35,000 towards improvements; while the full 203(k) requires a more thorough process and allows for virtually unlimited repair funds within program loan amount limits. 

A common feature to all these programs is the requirement for builder estimates upfront.  The biggest concern that banks have when lending under these programs is the possibility that the home may not be completed, hence their insistence on upfront information to confirm sufficient funds.  Also, bear in mind that these programs typically work only for owner-occupied homes; investors will need to seek alternate funds (check back soon for information on a newly available program for investors, too!). 

Thanks for reading today.  Please check back soon for more detail on the construction and rehabilitation process.