Without the FHA and HUD, buying a fixer-upper can be a difficult problem. Most often a loan company will not offer a mortgage for a fixer-upper until the fixes are complete, and yet you cannot make the repairs until you own the home. The FHA 203(k) Rehabilitation Program loan, can help solve this problem.
The 203(k) Rehabilitation Program loan allows a buyer to obtain a mortgage on a fixer-upper that includes the cost of the repairs as well. The loan is only available for properties that will be owner occupied. That is, it cannot be used to purchase a property with the intent of making the repairs and re-selling.
A potential home buyer should approach buying a fixer-upper with the help of a knowledgeable Real Estate Professional. When presenting a sales agreement to the seller, it should be made contingent on a Rehabilitation Program Loan approval from the FHA. The buyer then selects an FHA approved 203(k) lender and seeks a detailed proposal of the work to be done and a cost estimate. An appraisal will be performed to determine the value of the property after renovations. Pending lender approval the loan will close for an amount that will cover the purchase price of the home as well as all repairs necessary. The 203(k) loan will often include an additional 10 to 20% for unexpected expenses.
The repair funds are placed in an escrow account and paid directly to the contractor, minus 10% to ensure all work is done properly. The final 10% is paid after the lender is satisfied with the completion of the work. Like most FHA mortgage loans, the down payment requirement of a 203(k) loan is 3% of the purchase price and repairs.
The FHA’s 203(k) Rehabilitation Program loan is a viable option for many potential home buyers.
