I think one of the biggest hurdles for any home buyer looking at a home and trying to see how to bring it to a live-able standard is the financing. The answer for many of the challenges found in these homes is the FHA 203(k) rehabilitation loan. Unlike a normal FHA or conventional loan where the lender will not proceed with a closing until the home meets certain standards of live-ability-protecting the loan and borrower, the FHA 203(k) provides a path for closing and then bringing the home to the acceptable standards. In today’s home market, when a third of all sales are distressed sales, and the preference is to sell these homes to people who are going to occupy them, the need has never been greater for this financing option.
A few years ago we saw the GSE’s, in particular, willing to improve their foreclosed homes to bring them to FHA standards and make a sale to an owner occupant more hassle free. For a lot of reasons, it seems today the only money being spent is for maintenance to preserve whatever value the home has, and to comply with community standards of aesthetics and safety. The missing appliances, stained carpets, broken toilets are being left to a buyer to repair. This has made purchasing a foreclosed home more difficult for the buyer depending on traditional financing.
The FHA 203(k) solution offers buyers financing with just one mortgage loan that includes an approved amount for the purchase and rehab work. This loan is to be used for one-four family dwelling (owner must occupy one of the units). The home must have been built over one year ago, and even if the home has been demolished, if a foundation is in place it may be possible to use this financing. It can also be used for a condominium in a project that has FHA approval.
The key to using this financing? The existing home needs to appraise for under market value and then at market value when the rehabilitation is complete. Also, repairs need to not be more than $35,000.
This issue also comes up often when looking at a home for sale by HUD. The standard FHA loan is called a 203 (b). On a HUD listing there is a line item that codes a home as IE (insured with escrow). To be eligible for this category the repairs must total less than $5,000 as determined by a FHA appraiser who has completed an appraisal of the home. The listing will then state a Repair Escrow and the details will be available for the items in this escrow. This information is for reference only. If a buyer wants to use an FHA loan utilizing a repair escrow it will be the 203 (B) program. The amount stated in the repair escrow will be multiplied by 110% and added to the amount borrowed under the FHA loan. The fact that this escrow amount is spelled out is for reference only. It does not affect the price listed. The price listed is the as-is price. A FHA lender will take the escrow information and the FHA appraisal already on file and create one mortgage to acquire the property and fund the repair escrow. Usually, the title company will administer the receipt and release of these funds.
These are two great ways to take advantage of the opportunity to purchase one of the foreclosed properties on the market today when you are not sure how to handle the needed repairs. You need a good lender on your team. We are happy to give you some names of lenders who can walk you through this process.