How to Buy a Fixer-Upper With FHA 203(k) Financing
Drive just about anywhere and you can find homes which would be great to own but plainly need repair and updating. The problem? Most mortgages help you buy a home but provide no funding for repairs.
"There is an exception," said Ray Brousseau, executive vice president with Carrington Mortgage Services. "FHA's 203(k) program lets you buy the house you want now and then provides the money you need to make repairs. With 203(k) financing you can buy an older home and fix it up, or you can purchase a short sale or foreclosure in need of repair with the 203(k). You can also buy a property which is in good shape but would be better with modernization and more energy efficiency."
Brousseau said Carrington ( www.carringtonhomeloans.com ) -- which offers loans in 40 states -- has seen many borrowers use the program.
"The attraction of the 203(k) program is that it makes the pool of potential properties wider and deeper for most buyers," said Brousseau. "With this kind of financing more homes can be considered because the cost of repairs is built into the loan."
With the typical mortgage you apply for financing, get an appraisal and go to closing. The mortgage is used to pay for the acquisition of the property. However, if you want to make additional improvements you then need cash or an additional loan.
"The 203(k) allows the borrower to acquire the property and fund improvements after settlement," said Brousseau. "This means there's one loan so the borrower doesn't have the cost and complexity of a second loan and a second closing. It can save time and money."
The 203(k) is ideal for owner-occupants interested in bank-owned properties (known as "REO" for "real estate owned" by lenders) and short sales. Such homes are typically available with significant discounts but in some cases require repairs and improvements.
"About a third of today's market involves REOs and short sales," said Brousseau. "When you finance upgrades with a 203(k) you're getting the advantage of today's low rates and avoiding higher-cost alternatives such as credit-card debt."
There are three steps to obtain a 203(k) loan:
1) Find a loan. The borrower locates an FHA lender who offers 203(k) financing. Many lenders do not provide such financing because the program requires more follow-up than a typical mortgage. Once a property is located the lender will want to know how the funds will be used. At this point the borrower usually obtains help from an "independent consultant," a 203(k) expert familiar with the program. The cost of the independent consultant can be financed under the 203(k) mortgage.
2) Settlement. The money needed to acquire the property is paid out at closing by the lender. With most loans all the money due to the borrower is paid out at closing. However, with 203(k) financing a portion of the loan amount is retained by the lender and set aside for repairs.
3) Disburse funds. Money from the loan is disbursed as approved work is undertaken and completed. This means the lender's involvement with the property continues after closing.
"At the end of the process," said Brousseau, "you have a house which has been upgraded and improved and is therefore more valuable."
So how does the 203(k) program really work? Let's look at some particulars.
Down payment. The FHA currently requires at least 3.5% upfront as a down payment plus closing costs. The 203(k) down payment is calculated on the total loan amount, including the money needed for improvements.
Refinancing. You can use the 203(k) program to refinance an existing loan for a qualified property and for approved repairs and replacements.
Type of property. Generally the property must have one to four units, including one which will be owner occupied. The dwelling must be at least one year old. The 203(k) can be used with condos but not with cooperative units. HUD states, "Homes that have been demolished, or will be razed as part of the rehabilitation work, are eligible provided some of the existing foundation system remains in place."
You can also use the 203(k) program to finance what is known as a "mixed use" property. This means some of the floor area can be used for commercial purposes. However, 203(k) funding can only be used to refurbish the residential portions of the property and not the commercial areas.
Type of improvements. HUD says "luxury items and improvements" are not eligible for 203(k) financing. However, a wide range of repairs and improvements are okay including painting, plumbing, electrical work, flooring, room additions, energy conservation and decks.
Investors. The 203(k) would seem to be ideal for investors, however under HUD rules the program is only open to owner occupants.
"We'd like to see the program expanded to include investors," said Brousseau. "Many markets now have a surplus of distressed homes. In many cases these properties are well located and well priced but in need of repair. If we could get more of these homes sold and repaired the inventory of distressed properties would be smaller and that would be good for home values in communities and neighborhoods nationwide."
Specialists with Carrington Mortgage Services can answer 203(k) questions and explain in detail how the program works. More information can be found at www.carringtonhomeloans.com or by calling 888-267-0584.
Article presented by: Shanna Alexander, Marketing Coordinator (MN, WI)
SOURCE: Original article By Peter G. Miller. 2012.
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