Many of the homes for sale in today’s market we can realistically call “distressed” homes. With all the bank foreclosures and short sales, people are just not taking care of their homes. While prices may be low, most first-time home buyers are stretching to buy a home and there just isn’t enough left over for taking care of deferred maintenance items, making repairs, or updating the home. This is where a little-known loan program, the FHA 203(k) loan program comes in.
An FHA 203(k) loan can be used for refinancing your current mortgage or for purchasing a new home. You must be an owner-occupant. Known as “renovation” financing, your mortgage is based upon the value of your home AFTER it is fixed up and the cost of the repairs are included in the loan, along with the purchase price of the home. Here’s how it works:
John & Sue are first-time home buyers and have save enough for a small down payment (3.5% for an FHA loan) on a moderately priced home. They have found a home listed at $175,000 in a neighborhood they like. Unfortunately, the home needs repair. The heating and air conditioning is shot and the kitchen and bathrooms need updating. Plus the home needs interior paint and it would be nice to have dual pane windows installed. With an FHA 203(k) renovation loan, John and Sue work with a contractor to develop a renovation plan and obtain a fixed price bid from the contractor. The bid includes new heating and air conditioning, installation of dual pane windows throughout, remodeling the kitchen and bathrooms and painting the interior of the home. The total price came in at $30,000, a sum that they could never afford to spend on the house if they went with a standard FHA loan. With a 203(k) loan, the FHA appraiser is armed with the renovation proposal when he appraises the home and provides an appraised value as if the repair and renovation has already been done! In most cases, the appraised value will be higher than the sum of the purchase price and cost of repairs. John & Sue’s loan amount is based upon the sum of the purchase price and the cost of repairs. After close-of-escrow, the contractor starts work and gets paid by the bank for his efforts. When everything is completed, John & Sue move in to their newly-renovated dream home!
The key to a successful FHA 203(k) transaction is picking a contractor that is familiar with the process and has a track record of good performance with these transactions. I recently met a contractor that seems to measure up well in the FHA 203(k) market. Daryl Whiteside of Hybrid Homes is well-versed in the requirements, process and delivery requirements for FHA 203(k) loans. A former executive with JTS Communities, he brings the structure and disciple of new-home construction to home renovations. You can learn more at www.hybridhomes.biz.
Rowland Fellows
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