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How do you get loans approved for FIXERS?

By
Real Estate Agent with Alain Pinel BRE 01367196

Lately, it's been puzzling and stressful in getting loans processed, especially for properties that are considered fixers.

Here's what's confusing to me: supposedly, both loans are approved, but there are conditions per the underwriters.

"HOLD BACK "ON Property 1 is in bad shape, with cracked plaster, peeling paint and wallpaper, and a part of the house that slopes slightly. The appraiser valued it at $10K less than accepted offer price, but we managed to get the seller to agree to the price reduction.

Then the underwriter wanted to hold back $50k in escrow while some repairs are done that include getting the foundation repaired to cure the slope. Fortunately, we have a buyer and a seller who are cooperative.

The buyer even offered to pay interest on the monies held back until the repairs are complete and the rest of the funds transferred to the Seller.

HEALTH AND SAFETY ISSUES ON Property 2 is in worse shape than the first. The appraiser flagged the badly water-damaged ceiling and wall in one bedroom, and also an add-on structure that is in severe disrepair. The underwriter rejected the loan because in his words, "There are obvious health and safety issues and the home could not be considered habitable. The cost and time involved to cure the issues would be prohibitive. So, I have to decline this loan at this time."

The buyer and the seller are working out a plan by having the seller credit the buyer, while the buyer performs the needed repairs. During this time, the Seller will sign a Notice of Non-Responsibiity towards the repairs, etc. that are done before the close of escrow.

Are there any special tips or strategies to get loans approved for fixers?

Who else has run into similar challenges, and what kinds of solutions were offered to overcome the underwriter's objections and reverse the decision to decline the loans?

 

Comments (9)

Cameron Novak
The Homefinding Center - 1000 Palms, CA
Real Estate Broker since 2008

The only loan I've worked with for a rehab house was an FHA 203k.  It went rather well and closed within about 45 days.

Cameron

Oct 23, 2008 06:36 PM
Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

Thanks, Cameron

Aren't FHA guidelines even stricter?

I have a third fixer --- and I anticipate facing another storm, It has no heat, a leaky roof, and holes in the ceiling, floor and walls. But it's a house!

Oct 23, 2008 06:51 PM
Joe Lane Richland
Kennewick Richland (and West) Pasco WA Homes For Sale - Richland, WA
WA Realtor, 509.438.9344 www.LaneRealEstateTeam.com

This is a tough one Pacita.  Whatever has worked for folks in the past, may not (probably not) work in the future given the credit climate right now. 

Oct 23, 2008 08:57 PM
Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

Joe,

Wouldn't it be nice if there were programs to motivate people to buy up all these dilapidated homes and fix them up? Instead of making it harder for folks to buy fixers, banks should encourage it.

 

Oct 24, 2008 04:14 AM
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Pacita - all three houses that you have discussed are prime candidates for the FHA 203(k) loan program.  With a 203k, the loan amount is based on the appraised value after the repairs.  The funds needed to repair the home and make it safe and habitable is held in escrow and paid out as the repairs are completed.  The buyer has to get two appraisals, one "as-is" and one completed, but it's a great way to buy and repair a fixer.

There are, of course, disadvantages with this particular program with the first being that there are very few lenders who do these loans and the second is that many of the REO banks who own these fixers often don't want to accept FHA offers because they prefer to wait for an all cash offer.

If you're interested in referring your buyers who are looking for a 203k loan to an approved lender, let me know and I will forward to you some sources that I work with for this particular loan product.

Oct 25, 2008 06:31 AM
Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

Donne

Thanks so very much! I will check with my lenders about this program and see what they say.

There is hope!

Pacita

Oct 25, 2008 06:46 PM
Patty Carroll
Vancouver, WA

There is a lender in our area that has a product just for fixers, her name is Marie and she is with Homestreet Bank in Vancouver, WA.

Oct 27, 2008 05:51 AM
Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

I sent this to a few lenders, and here are their responses:

BANK, one lender

FHA will lend to "fixers". However, the clients will be required to go full doc.

  • 3 yrs tax returns
  • 2 yrs W2
  • 2 months asset statements (any deposits over $300 will be sourced)
  • MI required even if the LTV is at 80%
  • 1 pt origination fee

Same Bank, different lender

Its like a construction loan.  Buyer would need to get construction plans for the repairs and modifications, get the bids and the appriasals and submit to FHA for approval.  Buyer will need to qualify for the futue value of the home, not the sales price.  It is a difficult program which we do not offer, but I have a contact at Wells Fargo if you have a buyer that wants to investigate.  It will take about 6 months...thats the glitch.  Appraisal and upfront fee to borrower is around $1000 plus construction drawings etc...

From mortgage broker

I am trying to get someone into a home with this program however there are a ton of challenges as this person wrote.

  1. Few lenders do them and due to future appraised value it can be extremely difficult to figure out the loan amount.
  2. It is true - REO's are the prime candidates for this type of financing however they will be the last to accept the offer. Escrow can be 60+ days
Oct 27, 2008 10:56 AM
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Pacita - I have someone I can do these loans with, however, he does both retail and wholesale lending if your buyers want to go direct to him.  Let me know if you want his contact info.

As I've state before, there are not a lot of lenders who do these loans so when you find a good one it is good to keep that person on file for any of your contacts who need a good 203k lender.  However, I disagree with some of the sources you checked with.

First of all, it's one loan, unlike a construction loan, which is essentially two loans (one during construction and one after construction).  However, like a construction loan, the repairs are paid for by drawing on the escrow acct that was set up for the repairs.

Secondly, to the best of my knowledge, Wells Fargo does not offer this program and it does not have to take six months.  I think whoever told you that confused it with the fact that you have up to six months to complete the repairs.  However, that does not mean it will take you six months to get the home and start repairing it.

Although there are some upfront costs associated with the loan, they are no different than the costs associated with any other loan such as appraisals and inspections.  The FHA upfront MIP can be financed into the loan like any other FHA upfront MIP fee.

Lastly, I am afraid that it is true that REO sellers and their agents are not enthusiastic about accepting the 203k or any other FHA product, for that matter.  As I stated in my previous comment, this is an ongoing issue that any and all FHA buyers face when wanting to make an offer on an REO.  But, once again, that could be said for any FHA product and not just the 203k.  What I believe most REO sellers and their agents want is either a cash offer or a conventional offer with a large enough down payment so that when the property doesn't appraise at value, then there is still a chance that the deal will close, which is often the problem with FHA loan because the down-payment generally isn't large enough to cover the difference between the sales price and the appraised value.

If you'd like more info on what types of repairs that the 203k will cover, see my blog Got Rehab?.  I go into a little more detail and Jennifer Fleischmann w/National City is someone who could also answer any questions and/or concerns you have about the 203k.  I want to also refer Skip Schenker at Metropolitan Home.  Jennifer does retail lending for the 203k and Skip does wholesale lending for the 203k.

Sorry for the long comment but I just wanted to clear up some of the misinformation that you were given.  I hope this helps.

Oct 27, 2008 01:30 PM