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The purchase
of a house that needs repair is often a catch-22 situation, because the
bank won't lend the money to buy the house until the repairs are
complete, and the repairs can't be done until the house has been
purchased.
HUD's 203(k) program can help you with this quagmire and allow you to
purchase or refinance a property plus include in the loan the cost of
making the repairs and improvements. The FHA insured 203(k) loan is
provided through approved mortgage lenders nationwide. It is available
to persons wanting to occupy the home.
The downpayment requirement for an owner-occupant (or a nonprofit
organization or government agency) is approximately 3% of the
acquisition and repair costs of the property.
The 203(k) loan includes the following steps:
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A potential homebuyer locates a fixer-upper
and executes a sales contract after doing
a feasibility analysis of the property with their
real estate professional. The contract should
state that the buyer is seeking a 203(k) loan
and that the contract is contingent on loan
approval based on additional required repairs by the FHA or the
lender.
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The homebuyer then selects an FHA-approved 203(k) lender and
arranges for a detailed proposal showing the scope of work to be
done, including a detailed cost estimate on each repair or
improvement of the project.
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The appraisal is performed to determine the value of the property
after renovation.
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If the borrower passes the lender's credit-worthiness test, the loan
closes for an amount that will cover the purchase or refinance cost
of the property, the remodeling costs and the allowable closing
costs. The amount of the loan will also include a contingency
reserve of 10% to 20% of the total remodeling costs and is used to
cover any extra work not included in the original proposal.
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At closing, the seller of the property is paid off and the remaining
funds are put in an escrow account to pay for the repairs and
improvements during the rehabilitation period.
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The mortgage payments and remodeling begin after the loan closes.
The borrower can decide to have up to six mortgage payments (PITI)
put into the cost of rehabilitation if the property is not going to
be occupied during construction, but it cannot exceed the length of
time it is estimated to complete the rehab.
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Escrowed funds are released to the contractor during construction
through a series of draw requests for completed work. To ensure
completion of the job, 10% of each draw is held back; this money is
paid after the lender determines their will be no liens on the
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For a list of lenders who are offering the 203(k) Rehabilitation
Program, please see the
203(k) Lenders List. The interest rate and discount points on the
loan are negotiable between the borrower and the lender.
Return to 203(k) home |
