Combine Purchase, Repair Money In One Loan
So you've found a home, perhaps a foreclosure, that's in the right location at the right price. You'd love to buy it, but it needs some work. And the seller, which may be a lending institution or the U.S. Department of Housing and Urban Development (HUD), is not offering to help pay for the fix-up.
Is there a way to finance the repairs so that you don't have to come up with what may be thousands of dollars?
There is if you're going to be using an FHA-insured loan. Through what's known as the 203(k) program, you can add the repair costs into a primary mortgage and finance it over the life of the loan - at a much lower interest rate than with conventional alternatives.
"The 203(k) is becoming very important right now, because there are so many bank-owned homes on the market, you can't work with the sellers to get homes repaired," says Sherri Hopper of RE/MAX Properties in Colorado Springs, Colo. Hopper has worked with several clients who have used the 203(k) in their home purchase.
The FHA (Federal Housing Administration) doesn't actually lend money, but insures lenders against a loss if a borrower defaults on a loan. FHA-insured loans require lower down payments (3.5 percent) than conventional mortgages and have more flexible requirements, allowing borrowers with less than perfect credit to obtain a loan with a competitive interest rate.
Hopper provides these tips for buyers interested in a 203(k) loan:
- Work with a lender that has expertise in the program; not all do. A professional real estate agent should be able to help you identify such a lender.
- Be aware that closing a 203(k) loan will take longer than a conventional loan, so patience is a plus. Lenders may request additional paperwork throughout the process, so you need to be fully engaged.
- The amount of the loan will be based on the appraised value of the home after repairs are made.
- Contractors can't be related to the buyer, real estate agent or lender. And they must be validated by the FHA. You should make sure any contractors you're interested in using have filled out the paperwork to get validated. The contractor may be validated in as little as 10 days. The FHA can provide names of contractors who've already been validated.
- For some types of repairs, you can perform the work yourself if you're qualified. However, you can't be paid for the work.
- You're not required to get multiple bids, but it's in your interest to do so. After all, you'll be paying it off over 15 or 30 years.
- You can't use a 203(k) loan as an investor; only as an owner occupant. You can use the program for dwellings up to four units, provided you live in one of the units.
- You can use the 203(k) to fix up a condo, but only the interior.
It may take a little more time and effort, but a 203(k) loan can help you get into your dream home at a bargain price.
Read more about the 203(k) program.
Find a RE/MAX real estate agent in your area.
Search for homes in your desired neighborhoods.
Search foreclosed homes.
The advice offered here comes from sales associates affiliated with independently owned and operated RE/MAX offices and may not be applicable to all areas. Contact an independent RE/MAX agent near you for expertise tailored to your locale.