FHA loans require that a home be in livable condition before closing. If you are buying an investment property that needs extensive repairs then you will not be able to secure a FHA loan in order to purchase the property. Often, a bank will not grant a mortgage on a house that is in bad shape until the repairs are complete, and the repairs can't be done until you buy the house. Talk about a Catch 22! An alternative is the HUD 203(K) loan program.
The HUD 203(k) program makes it possible to purchase a property and include in the loan the cost of the repairs and improvements. It is an insured loan program that is available through approved lenders all across the country but is only available to people who will occupy the house. The down-payment requirement is 3% of the total cost-acquisition and repairs.
These are the steps to get a 203(k) loan:
o Locate a fixer-upper property. When you submit an offer make sure your purchase and sale contract stipulates you are seeking a 203(k) loan and that the contract is only in effect contingent upon approval of the 203(k).
o Find a lender who is approved by the FHA to grant these loans. Your loan application should include a detailed cost of each repair or improvement and an appraisal to determine the value of the property after renovation.
o If you pass the lender's credit worthiness test, you will be approved for a loan. The amount of the final loan will include a contingency reserve of 10 to 20 percent of the remodeling costs to cover any extra work that needs to be done.
o You close on the property, the seller is paid, and the money for repairs goes into an escrow account.
o Money for the contractor will be obtained through a series of draw requests; ten percent will be held back by the lender to assure that the work will be finished and there will be no liens on the property.
The main benefit of a HUD 203(k) loan is the ability to purchase a fixer upper property that requires extensive rehab work to bring it into a livable condition. In addition this loan reduces financing costs for borrowers with one mortgage by having only one set of closing costs that covers all eligible expenses.
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