Buying a Fixerupper

Do you want to purchase a fixer-upper but are being told the house will never pass inspection or the bank appraisal? Wondering if the only people that can buy these homes at a deep discount are people that have vaults full of cash or large commercial lines of credit? Many consumers give up on the dream of homeownership because they are often given incorrect advice and conclude that rehabilitation and renovation of properties is the exclusive realm of investors and builders who have the financial means. 

 

Well, there is a very practical and accessible alternative that few consumers know exist and unfortunately many banks avoid, but it is a very viable financing option for properties that need some work to bring them up to market standards. If the property does not need major structural work, and most of the issues are cosmetic in nature within a range of $30,000 to $32,000, you are in luck! The solution is a specialized FHA loan that falls under HUD Section 203(k) Streamline. The program is often misunderstood and shunned by many banks, credit unions and mortgage brokers because of the complexity compared to non-rehabilitation loans. But in the current market with so many homes in disrepair after months of vacancy or being vandalized, the program is more pertinent than ever. (Though technically the 203(k) Streamline program allows up to a maximum of $35,000 in repair costs, if you want to limit your cash to closing to the 3.5%, closing costs and prepaids, it should be kept in mind that there are other uses of cash that can be financed within the loan that absorb part of the $35K such as contingency reserves, consultant fees and inspection fees.)

 

The 203(k) Streamline loan permits the borrower to repair or modernize properties without having to get a full blown construction loan. These loans are also much cheaper than construction loans. The loan is offered as a 30 year fixed rate mortgage and to a certain extent functions like mini-construction loan in that it finances the acquisition of the property but also leaves room for the proposed renovation. However, unlike many construction loans, there are no two separate closings or separate closing costs, nor an initial temporary rate and a final permanent interest rate. Under the 203(k) program there is only one closing, one set of closing costs and the rate you close at is the rate for the life of the loan.  As with a standard FHA loan that falls under section 203(b), the seller is allowed to contribute up to 6% towards closing costs and or prepaids The maximum Loan-to-Value (LTV) is still 96.5% so you are required to come up with the 3.5% minimum investment. You can obtain down payment assistance in the form of a 2^nd mortgage to a maximum Combined Loan-to-Value (CLTV) of 105%.

 

There is no minimum repair cost threshold, however if the repairs are less than $1,000, the 203(k) program may not be a cost effective option due to draw and inspection fees as well as a rate that may be slightly higher than on a standard FHA loan. In cases where the repairs are less than $1,000 you should enquire with your lender about the possibility of doing a repair escrow, where the funds are held back in a special escrow account until the repairs are completed, but the loan still closes on time and one can use a standard FHA mortgage. You should also check with your realtor and the listing agent as many times after the loan is approved and you have a conditional commitment letter from the lender contingent only on certain repairs, the seller may allow you to perform the repairs prior to closing. Of course you should be careful with this option and make sure there are no other approval contingencies or issues with the property before you invest any money to do the repairs.

 

The loan can be used to purchase Single Family Residences, Townhomes, Condos, and 2-4 unit properties. However, keep in mind that with Condos, you will need to make sure that the condominium project is FHA approved and that the lender does not have other guidelines that they may superimpose for condominium financing. You can check to see if the condominium is FHA approved by going to https://entp.hud.gov/idapp/html/condlook.cfm, and entering the project name and location.

 

The 203(k) program is also a great alternative for purchasing HUD Foreclosures that have been designated as uninsurable, in other words FHA insurance cannot be granted, because of certain repairs that are needed to the property. Under the 203(k) streamlined program, the money can be used for the following types of repairs which are non-structural or reconstruction in nature, though the following list is not all inclusive:

 

·         Repair/Replacement of roofs, gutters and downspouts

·         Repair/Replacement/upgrade of existing HVAC systems

·         Repair/Replacement/upgrade of plumbing and electrical systems

·         Repair/Replacement of flooring 

·         Minor remodeling, such as kitchens, which does not involve structural repairs

·         Painting, both exterior and interior

·         Weatherization, including storm windows and doors, insulation, weather stripping, etc.

·         Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwave ovens

·         Accessibility improvements for persons with disabilities

·         Lead-based paint stabilization or abatement of lead-based paint hazards 

·         Repair/replace/add exterior decks, patios, porches

·         Basement finishing and remodeling, which does not involve structural repairs

·         Basement waterproofing

·         Window and door replacements and exterior wall re-siding

·         Septic system and/or well repair or replacement

 

The 203(k) Streamlined program should not be used for the following:

 

·         Major rehabilitation or major remodeling, such as the relocation of a load-bearing wall;

·         New construction (including room additions);

·         Repair of structural damage;

·         Repairs requiring detailed drawings or architectural exhibits;

·         Landscaping or similar site amenity improvements;

·         Any repair or improvement requiring a work schedule longer than six (6) months; or

·         Rehabilitation activities that require more than two (2) payments per specialized contractor.

 

It should be noted that the 203(k) streamlined loan is not a low documentation or alternative documentation loan in terms of the credit process. Neither is it a sub-prime credit alternative. You qualify for the 203(k) as you would for a standard FHA mortgage to purchase a house that requires no repairs. You should also be prepared to meet certain qualifying criteria that each bank may superimpose on the program.

 

The 203(k) stream line program has many other nuances and it should be thoroughly discussed with a trusted mortgage professional. If used properly it is a financial tool that will help many potential buyers purchase a home at a deep discount and then bring the property to market standards with little effort and reduced costs. If the property does require repairs that are structural in nature, then there is the option to go with a Full 203(k) loan (vs. a 203(k) Streamline) which is a little more complicated in nature but still much easier than a full blown construction loan.

 

For more detailed information on the 203(k) Streamlined mortgage, please see Mortgage Letter 2005-50 which can be found at:  http://www.hud.gov/offices/hsg/sfh/203k/203kslrp.cfm for additional information on a full blown 203(k) loan please go to http://www.hud.gov/offices/hsg/sfh/203k/203kabou.cfm.