One of the biggest barriers for any homebuyer looking at a foreclosed home and trying to visualize how to bring it to an enjoyable standard of living is the financing. The answer for many of the challenges found in these homes is the FHA 203(k) rehabilitation loan. Unlike a normal FHA or conventional loan where the lender will not proceed with a closing until the home meets certain standards, the FHA 203(k) provides a path for closing and then bringing the home to the suitable standards.
The FHA 203(k) program offers buyers financing with just one mortgage loan that includes an approved amount for both, the purchase and rehab work. This loan could to be used for one-four family dwelling (owner must occupy one of the units). The home must have been built over one year ago, and even if the home has been demolished, if a foundation is in place it may be possible to use this financing. It can also be used for a condo in a complex that has FHA approval.
There are two major requirements:
- The existing home needs to appraise for under market value and then at market value when the rehabilitation is complete.
- Improvements must be less $35,000.
There is also the standard FHA loan that is called a 203(b). On a HUD listing there is a line item that codes a home as IE (insured with escrow). To be eligible for this category the repairs must total less than $5,000 as determined by a FHA appraiser who has completed an appraisal of the home. The listing will then state a Repair Escrow and the details will be available for the items in this escrow. This information is for reference only. If a buyer wants to use an FHA loan utilizing a repair escrow it will be that 203(b) program. The amount stated in the repair escrow will be multiplied by 110% and added to the amount borrowed under the FHA loan. The fact that this escrow amount is spelled out is for reference only. It does not affect the price listed. The price listed is the as-is price. An FHA lender will take the escrow information and the FHA appraisal already on file and create one mortgage to acquire the property and fund the repair escrow. Usually, the title company will administer the receipt and release of these funds.
These are two great ways to take advantage of the opportunity to purchase one of the foreclosed properties on the market today when you are not sure how to handle the needed repairs. You need a good lender on your team. We would be happy to connect you with a few reputable lenders who can walk you through this process.