As is … not so bad with a little help from FHA

It is possible to turn that “pig’s ear” into a “silk purse”.  With a little imagination, input from a good contractor and a 203K loan, you can convert that abandoned bank owned property into a pretty sweet home.

Sure, you visited the property and spent more time stepping over mysterious stains on the floor than you thought could be possible.  OK, the place had been trashed. It is not the only home a non-mortgage paying miscreant attempted to destroy on their way out. Try to remember that they had little regard for the note they signed and the damage they did on their way out was on par for their lack of moral character.  The house didn’t always look that way.

Beneath the rubble and beyond the disrepair, there is a home waiting to be enjoyed.  Try to look beyond what is apparent and visualize what can be.

You need help. It may have only taken one malfunctioning adult to wreak the havoc before you, but it can be repaired.  The home can be restored.  The bank may be saying “as-is”, but you can finance the repairs and upgrades in your purchase loan.

FHA 203 K loans are available and very attractive.  Bank owned and even short sale homes can be purchased using this program. If someone tells you differently, they are wrong. The program is alive and well and there for anyone that qualifies. The down payment is the same as a regular FHA loan (currently 3.5% of the loan amount).

What is a FHA 203k loan and why use one?

When a buyer wants to buy a home that needs repairs they are faced with a couple choices.  They can request that the seller make the repairs, which has usually been the case in home purchases or they can use the power of the FHA 203k loan. If the property being sought is bank owned, there is little choice.  The bank is not going to fix anything.  If you want to finance the home, you only cost effective choice is to use the FHA 203k program.

A FHA 203k loan will allow you to finance the cost of repairs (and in some cases, upgrades) in your new loan amount.  The loan amount can not exceed 110% of the value of the property after improvements.  The value will be determined by an appraiser and a 203k consultant.  In simple terms, if you purchase a home for $300,000 that is in need of repairs that will  cost $50,000 and will be worth $350,000 when the repairs are completed, you can borrow the $350,000. Really, that is the basic concept. Now, I am not a lender and these numbers are just conceptual, but they are pretty darn close to accurate. See, you can make that wreck a home.

There are specific details for the FHA 203k loans.  Some of  the details are.

  •   The Down payment is based on the sale price PLUS the final cost of the repairs x 3.5% so for example:

Sale price is 300,000 (DO not calculate 3.5% on this)  PLUS 50,000 in repairs/costs (which includes certain costs and reserves the lender will require) 350,000 x 3.5%.  Down payment is $12,250.00 (closing costs are separate).

  •  Buyer will hire (the lender can and may recommend) a HUD approved FHA 203k Consultant  to go to the property with the buyer to determine the required repairs and a wish list repairs.

The buyer can add the  fee charged by the consultant  into the mortgage.  The fees vary between $ 400 to $1200 depending on the repairs required.  It would be prudent to check with the consultant prior to scheduling your appointment.

  • The Buyer will obtain estimates from several licensed contractors for the work to be completed depending on how extensive the repairs.

Three estimates are recommended for each contractor but not necessary.  The buyer can act as their own general contractor only if experienced and licensed.  (FHA says experienced, but most investors require the buyer to be licensed)  The contractors must provide documentation to be approved by the lender prior to approval.

The consultant will determine the “required” repairs versus the “wish list repairs”.  You must start with the required repairs and then move on from there for you wish list. This is an important step for the consultant and appraiser so that you don’t over improve the home and exceed the comparable properties in the area.

Eligible Repairs

  1. Structural alterations and additions
  2. Garage (attached /detached/new)
  3. Remodel kitchen or bathroom
  4. Install appliances
  5. Changes to eliminate deterioration and reduce maintenance
  6. Repair swimming pool (up to $1500)
  7. Modernize plumbing/heating/air conditioning/electrical systems
  8. Install or repair roofing /gutters/downspout
  9. Install flooring /title /carpet
  10. Energy conversation improvements
  11. Major landscaping /decks/fencing
  12. Improvements for accessibility ( e.g. handicapped ramp)
  13. Interior and exterior painting
  14. Improvements that are a permanent part of the real estate

Ineligible Repairs

  1. New Tennis court
  2. Gazebo or bathhouse
  3. Additions or alterations to provide for commercial use
  4. Photo mural
  5. Television antenna or satellite dish
  6. New Swimming pool
  7. Outdoor fireplace/hearth/barbecue pit  (Sorry to those of you in California! Sob)

* Once the consultant completes his report of required and wish list repairs, the lender will forward it to the appraiser for an “After Improved Value”.  This is where you may run into problems with OVER improving the property based on current values.  Between the consultant, appraiser and buyer – the FINAL FINAL report will be tweaked to come up with a final report that the contractors will be hired to do.

* So now the file is submitted to underwriting and approved ( you need to qualify at the full amount you are borrowing of course, which may include your current mortgage payment for the home you will live in during the rehab period) and the normal steps for closing will occur.

(Important note – you may include 6 months of mortgage payments in the new loan amount since it’s assumed that you will have TWO housing payments during the rehabilitation of the new home.  This money will be deducted each month during the rehab process) This is optional.

* Closing occurs, and the work begins within 30 days of closing/funding. (This is when your mortgage payments start since this is when you started borrowing the money – however, if you included the 6 months mortgage payments, they will be deducted from escrow starting when your first payment is due)

* Disbursments are made throughout the following 6 months from the escrow account (normally 4 draws with one final inspection, but  this can be increased for higher repair amounts) as the work is completed.

Remember you paid the seller for the price of the home, and then you borrowed an additional amount of X which is sitting in an escrow account to pay the contractors (your total loan is the total amount you borrowed)

Once the last disbursement is made and the final inspection showing COMPLETED AS PER THE CONTRACT……..you are done! You should note that having an experienced lender on your side is crucial!

Of course, some homes do not qualify. Check with your lender.  If you want to view homes, let me know your needs and I will help. I can be reached at 301-509-5111.

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