How do you get a loan to buy a fixer-upper? This is a common question. One of the criticisms of conventional loan programs is that they require the property to be in excellent shape. The whole point of buying a fixer-upper is to get a great deal and make a profit on the fix up. And a lot of sellers want to sell in as-is condition, they don't want to carry out the work. This leaves the buyer in a catch-22 situation; he can't get a loan because the house is in too poor a shape and he can't fix up the house because he can't close. The 203k program is the Federal Housing Administration's (FHA) answer to the criticism. The 203k program allows for the purchase (or refinance) of a property, plus the cost of repairs and improvements. A bank or mortgage company makes the loan under the guidelines of the FHA. You will need to qualify for the loan in the usual way.
The process starts off with a detailed proposal that includes:
o The scope of work
o A cost estimate for each repair or improvement
The next step is to obtain an appraisal that determines the current value of the property and the value after the renovation.
When the loan is made it will include the purchase cost, the remodeling expenses and the closing costs. A contingency reserve is kept of between ten and twenty per cent of the anticipated remodeling costs. The contingency reserve is to cover any additional work necessary that is not in the original proposal.
At the closing the seller is paid and the remodeling funds are paid into an escrow account. The escrowed funds are paid to the contractor through draw requests for completed work. As the contractor completes and shows that the work is satisfactory he can request draws on the funds. (Ten per cent of each draw is held back until completion of the job). These funds are released once the lender determines that there are no liens against the property.
The mortgage payments and remodeling begin after closing. If you will not be able to occupy the property due to the construction up to six mortgage payments can be added into the cost of remodeling.
The 203k program makes it possible to purchase properties that the buyer might not otherwise be able to get a low down payment loan on. You can take advantage of this program to purchase a single or multi-family unit, fix it up and build substantial equity. All this with a low down payment, below market, FHA loan!
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