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How to Buy a Fixer Upper for Only 3.5% Down

By
Real Estate Agent with Prudential California

How to Buy a Fixer-Upper for Only 3.5% Down

Did you ever wonder how homes that are ‘fixers' could be purchased without paying cash?   The answer is with a rehabilitation loan. 

Traditional rehab loans require more than one loan.  The first loan is used to purchase the property. the second loan is for the rehab and the third loan would  a refinance loan so everything is put into one loan.  The down payment for this type of loan is also significantly higher than 3.5%.

The FHA 203K  loan, however, requires only 3.5% down and is all put into one loan.  This type of loan also has a fixed interest rate, while the traditional rehab loan does not.

So, how does the process work?  Well first you must find an FHA approved lender.  That isn't very difficult.  In fact the lenders I work with are all able to do FHA loans.  Then you need to find the property.  Once you have determined which property to buy you will need to have estimates done for pre- and post-renovation.

 The lender will then lend you the amount necessary to purchase and renovate the home.   The funds for the purchase will go to the seller and the funds for the rehab work will go into an escrow account.  This escrow account will pay the contractor as work is completed.   With this type of loan you will need to use an FHA approved contractor; no do-it-your-selfer's.   Also, loan rates run around 1% higher than a traditional FHA loan and closing costs are slightly higher as well.

Here is a brief synopsis of what type of property's qualify for  a 203K rehab loan.  It's important to know that this process is very complicated and much more involved than I have outlined here.  It is important to find an experienced 203K lender and real estate agent to help you with the process.

Single Family Residence:

  • 1-4 unit family dwelling
  • Can convert 1-family dwelling to a 2,3, or 4 unit residence or to convert a multi-unit dwelling to a 1 unit family residence.

Condos:

  • Owner occupied buyers only (no investors)
  • Interior rehab only
  • Complex must be FHA approved
  • No more that 25% of units in condo project can be undergoing rehabilitation at one time.

Eligible Improvements:

  • Repairs and Modernization
    • Includes painting, room additions, decks etc,
    • Does not include  luxury items.

Required Improvements:

  • Cost Effective Energy Conservation Standards
  • Smoke Detectors.

If you have found a fixer-upper that you would like to buy with little down, or if you would like to find a fixer-upper please contact me.  I have the market knowledge and the necessary lender contacts to make this process as smooth as possible.

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Comments (2)

Jesus Sotelo Carrillo
Capitol Real Estate Group - Visalia, CA

Christa, 

This is great information. Havent seen to many of these done in our local market.

Oct 25, 2010 11:45 AM
Rodney Mason, VP of Mtg Lending
Guaranteed Rate NMLS# 2611 - Atlanta, GA
AL,AR,CA,CO,FL,GA,IN,MI,MS,NC,SC,TN,TX,VA

The FHA 203K is a great program.  Getting the word out about it is very important.

Oct 25, 2010 02:21 PM