FHA Financing For a Dirt-Cheap Fixer-Upper

The Federal Housing Administration (FHA) can help you get a great deal on "vintage" real estate.

The FHA runs a few programs to put a nice roof over the heads of not-so-wealthy Americans. Section 203(k) of the National Housing Act is the basis for some of the most flexible and powerful mortgage plans available anywhere-but they can also be very complex. Luckily, there are a few shortcuts.
    

Basics of 203(k) borrowing

When you buy a fixer-upper using a normal mortgage loan, the bank usually wants you to finance the home and the improvements separately, and then roll it all into a single cover-all loan. It's a tricky dance in several steps, and you'll be saddled with some hefty interest rates for some of the interim loans.

Government rehabilitation 203(k) plans were designed to do away with this tricky business in most cases. To qualify for an FHA mortgage, you should be eyeing a one-to-four family home in need of serious repairs. The unit must be more than a year old, and the foundation must still be usable. Anything beyond that slab of concrete is just a nice bonus.

The repairs must be worth at least $5,000 for you to qualify, but the upper limit is much higher. In expensive areas like New York or California, the ceiling can be $600,000 or more. But you can't add swimming pools and other "luxury" alterations.  You'll also need at least two professional appraisals ("before" and "after"), and you'll have to present a detailed outline for the work that includes plot plans, proposed interior plans, a write-up of the work needed, and cost estimates. That's a lot of paperwork for what might become a very large loan.

Streamline K

That's where the "streamline K" plan comes in. True to its name, this form of government rehabilitation streamlines the 203(k) process and does away with most of the paperwork. You may need only one appraisal and far less detailed descriptions of the work.

This comes at a price, of course. Streamline K loans will only cover up to $35,000 of "discretionary" repairs. Anything that would require the services of an architect or engineer is out the window-but you can apply for a full-blown 203(k) loan in that case. The streamliners are there to help with relatively minor changes like paint jobs, new flooring, plumbing work, or fresh kitchen appliances.

Using a government rehabilitation loan

If that house you're looking at only needs some sprucing up and a quick kitchen remodeling, the streamline K could be your ticket to homeowner bliss. But if you're planning to knock down a wall or two, spend more than $35,000 on needed improvements, or tear down the existing structure and build something new on its old foundation, the full fat 203(k) could help. Either way, you're taking a very complex financial maneuver and making it much simpler. It's just a matter of magnitude.