When looking for a home, not everyone wants the biggest, best and the newest home. In fact, some people like an old home. Homes with some age tend to have unique architecture, larger lots, more established neighborhoods, little to no HOA fees and they often represent a different type of home ownership all together. But what happens when the home needs so much work, the lender won't give you a loan to buy the home?
Unfortunately, FHA requires any home sold with an FHA loan to meet
strict guidelines. Essentially if the government is going to back a
mortgage, they want to home to be in good working condition and
habitable. This presents a problem to a lot of homeowners looking for an
older home, because anything from cracked windows, non-standard
flooring, roof damage, missing appliances, etc will be grounds for FHA
denying the loan.
This is where the 203k program comes in. Through this program the
homebuyer can receive an additional loan for up to $35,000 to repair or
improve the home to meet FHA guidelines. In order for this to work, the
buyer hires a contract to get bids on everything that needs to be done,
they submit the bids to the lender and the lender finances the
additional amount for the repair. The money for the repair goes into an
escrow account to pay the contractor for the work when it is completed.
After the transaction has closed and the buyer takes possession of the
home, the buyer has 90 days to get the contractor to complete all the
work on the home. Once the work is completed the contractor gets paid
and the escrow account closes. This is a great program for anyone
looking at a foreclosure home and the home may be in less than perfect
A common question is, "will the additional loan hurt the appraisal value
of the home?" The answer here, is "most likely no". As long as the
purchase price of the home represents the fair market price of the home,
then any repairs made with this program would increase the value of the
home by the amount of the repairs being done, if not more. What if you
are looking at homes in the top of your price range, and can not afford
the higher mortgage amount? In this case, the best way to look at it
would be to find a home that needs a fair amount of work done, and bring
in a reasonably low offer. Lets say the home is priced at $170,000 but
you see it will need at least $20,000 in repair. Place an offer for
$145,000 to $150,000 and let the seller know of your intentions to bring
the home up to FHA standards through the 203k Streamline program. In
most cases, the listing agent or the owner of the property will be well
aware of the challenges involved with selling a home that won't pass FHA
inspection/approval, and they will welcome the lower offer and knowing
you plan on making the deal work with an FHA loan.
Talk with a qualified loan officer about the additional details involved
with this program. It is a pretty simple and straight forward, program,
nevertheless, it is always a good idea to talk about the program with
the person who will be helping you through the process.
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