Do you shy away from showing your clients properties with deferred maintenance issues due to concerns over financing complications? These properties may be short sales, bank owned, or just generally run down due to the owner's lack of ability or desire to make needed repairs. Of course, all things being equal, we would all take the well maintained property over the run down one. But, except in thermodynamic equations, very few things in life are truly equal and a run down, short sale property may be just the screaming deal your clients were looking for, if only you could be sure of financing.
The good news is that there are good options for financing properties with deferred maintenance issues. The two most common strategies for dealing with such properties are escrow hold backs and FHA 203K loans. Each of these options has limits, but, between the two, there are a broad range of options for dealing with otherwise unacceptable deferred maintenance issues.
The chart below illustrates some of the more salient features of the two programs.
|
Feature |
Escrow Holdback |
203K ("Rehab") Loan |
|
|
|
|
|
Max Costs |
Varies |
$5k - $35K |
|
Eligible with Various Loan Programs |
Yes |
FHA only |
|
Funds can be paid to sellers |
Yes |
No |
|
Do-It-Yourself Allowed |
No |
Yes |
|
Contingency Reserve |
1.5 x highest bid |
10 - 20% of bid |
|
Disbursement (to contractor) at closing |
No |
Up to 50% of repair costs |
|
Multiple bids required |
Yes (2) |
No |
|
Ineligible Repairs |
Health & Safety, Structural, Foundation, Improvements / Upgrades, Remodel |
Health & Safety (with some exceptions), Structural, Foundation, Relocation of Wells, Septics, Exposed studs, wires, pipes. |
Generally, the escrow hold back is the more flexible and less involved of the two, but, it can require borrower to have up to 2 times the cost of the repair in cash at closing. This is because an escrow holdback lender is not providing the repair funds to the borrower (like a 203K lender). They are simply allowing the borrower to close on a property by requiring the borrower to deposit 1.5 times the cost of repairs (bid amount) at closing. If the contractor also requires a deposit, total cash require from the borrower can reach 2 times the actual amount of the repair.
Neither of these programs will address every deferred maintenance issue, but, for many buyers / borrowers, they might make all the difference between the dream home and dream on.
The views expressed in this article are entirely my own and do not necessarily represent the views of Guild Mortgage Company.
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