Tempted by foreclosure or "as is" listings but wonder how you can afford to make them livable? FHA's streamlined 203(k) mortgage is your answer.
You've probably seen listings for impossibly cheap foreclosure or "as is" homes and asked yourself just how bad they could be. Pretty bad, actually! Sometimes the owners of these homes simply could not afford to maintain them. Other times, though, the owners went out of their way to trash them.
"I've been experiencing a lot of clients lately in these situations," says Seattle-based FHA 203(k) residential mortgage banker Dan Keller. "Mr. and Mrs. First Time Homebuyer have found a really good deal on a foreclosure, but the previous homeowners either (1) abandoned the home and damaged it prior to getting foreclosed on, or (2) They took personal property such as appliances, cabinets and flooring with them prior to getting foreclosed." In both of these cases, the bank that foreclosed (new seller) will not restore the home. Instead, they sell it at a discount, "as is," and the only way to purchase a home like this is with a substantial down payment or an FHA 203(k) rehab loan."
The catch-22 for some of these foreclosed or "as is" homes is that the bank doesn't plan to make any repairs, however, the buyer can't get FHA financing without flooring, appliances, toilets, and other basic functional items.
Also, most other mortgage financing programs will not close a loan unless the condition and value of the property provides adequate security for the lender. A lender typically requires any improvements to be finished before a long-term mortgage is made. What this typically means is that lenders don't want to give you money for a home that is falling apart even if you plan to use that money to put the home into livable condition and make it into a worthwhile investment.
The beauty of the 203(k) program is that it streamlines this whole process. Basically, the FHA 203(k) loan program is an FHA mortgage and a home improvement loan rolled into one 30-year fixed mortgage loan. It's about $495 more in fees and about a quarter or three tenths of a point higher than basic FHA rates.
There are two types of FHA 203(k) mortgage: regular and streamlined. The regular version is for property that needs structural repairs while the streamlined version is for homes that need non-structural repairs. Both types of loans can be used for either a purchase or a refinance.
The streamlined version lets homebuyers finance an extra $35,000 into their mortgage for home improvements before they move in. This extra funding can pay for repairs that will help the home to pass the appraisal inspection for regular FHA or VA home loans. It can also simply close the gap between in personal finances between the down payment and the repairs necessary to make a house livable.
Here's how a typical Streamlined FHA 203(k) purchase works. Let's say that a house lists for $200,000. The buyer inspects it and figures out that the house needs $20,000-$25,000 in repairs. They offer $180,000 to the seller and, after the seller (hopefully) accepts, get a loan for $200,000 that pays for the total cost of the house with the repairs.
"I'll give you an example of a client that I just closed on this week," says Keller, to further explain the process. "They put in new carpet, new hardwood floors, new granite counter tops, a backslider door, and a fence in their backyard. It ended up costing about $26,000, which they negotiated into the contract. They got a check at closing for 50% of that $26,000. After a contractor does the work, he will request a second draw and get the rest of the cash. Then, we have an FHA appraiser come out and verify that the repairs have been done the clients are good to go."
If you are a first time homebuyer, the FHA Streamlined 203(k) may end up being essential to your purchase, especially if you plan to buy a short sale, foreclosure, or fixer upper. "I'm a big advocate of this great loan program," says Keller, "Especially as we continue to navigate through this foreclosure rich market. Since the banks that foreclose and re-sell these homes aren't willing to pay for the much needed repairs, the FHA Streamlined 203(k) loan program is really the only financing option for many of the great deals that are out there."