Many people looking to buy homes that need repairs, called fixer uppers, are faced with a big problem. Most banks won’t lend the money to purchase a home until repairs are complete, and the home repairs can’t be completed until the house is actually purchased. But, HUD has a new program to help with this ironic situation.
There is a HUD FHA program called 203(k) that allows you to purchase or refinance a fixer upper, plus include in the FHA loan the cost of the home repairs and improvements. This FHA loan is provided through mortgage lenders all over and it’s available to anyone wanting to purchase a fixer upper. There are seven main steps to a 203(k) loan. First, the potential home buyer must find a fixer upper and complete a sales contract, after doing an analysis of the property with their real estate agent. The completed sales contract should basically state that the buyer is seeking a 203(k) FHA loan and that the contract is useful on loan approval based on additional home repairs by the FHA or the loan lender. Second, the potential homebuyer of the fixer upper selects an approved 203(k) loan lender and plans out all the work that must be done to the fixer upper, including a detailed cost estimate of each home repair or improvement. The third step in this HUD program is the appraisal. The appraisal must be done to determine the value of the fixer upper after all the home repairs. Next, if the homebuyer passes the fha lender’s credit test, the loan will be closed for an amount that will cover the purchase or refinance of the fixer upper, the home repair costs and the allowable closing costs. Also, the amount of the loan will include a safety benefit of 10 to 20% of all the home repair costs and is used to cover all of the extra work not included in the proposal.
The fifth step in the 203(k) program is at closing, the home seller of the fixer upper is paid and the remaining funds are put into escrow. This escrow account pays for the home repairs during the rehabilitation period. The 6th step is paying the mortgage payments. After the FHA loan closes, the homebuyer has the option to have up to six mortgage payments put into the cost of home repair rehabilitation. If the home is not going to be occupied during construction then this payment plan is possible, but it can’t exceed the length of the rehabilitation period. Finally, the last step in this 203(k) loan is handing over the escrowed funds to the contractor in installments. 10% of each payment is kept to ensure the completion of the home repairs. This money is paid after the loan lender determines there will be no more issues with the fixer upper.
There are many lenders who offer the 203(k) Rehabilitation program to people looking to make home repairs on a fixer upper they want to purchase. It’s hard to take out a loan for a home that needs repairs, but the FHA offers a plan like this to help homebuyers purchase their dream home.
Tags: Fixer upper, home repair