have a choice between
houses that are too small for their needs or rundown dumps. Among the
latter, however, are a great many housing nightmares that could be
turned into dream homes with a bit of work.
on a comparable house in
"perfect" condition. Paying for the house and the repairs, however, can be a bit tricky, as many lenders won't finance a house that needs a lot of work.
203(k) program, a mortgage insurance
program specially tailored for this situation.
While this article focuses on how to use the program to purchase a home, 203(k) loans can also be used to refinance your existing mortgage in order to rehabilitate a house you already own.
Determine how much
house you can afford.
Talk to a lender to see what loan amount you can be approved for based on your income and expenses. Most importantly, figure out yourself how much you can realistically afford. It's not uncommon to be approved for a loan that will stretch your budget to the point of foreclosure.
Find a house with
Look for a house you like in a neighborhood you like. The 203(k) program currently cannot be used by investors, so you'll need to live in the house (or be a qualified non-profit agency). Together with your real estate agent, perform a preliminary feasibility analysis, in which you identify the repairs necessary, estimate the cost of these repairs, and estimate the market value of the home after the repairs. You can save yourself some money by doing this before you order appraisals or estimates, since you may determine that the cost of repairs is too high.
Execute a contract
for the sale of the home.
In order to proceed with the 203(k) application process, you'll need a sales contract with a clause stating that the sale is contingent on your ability to obtain financing through the program.
Apply for the
Contact a HUD-approved lender to apply for the loan. You can obtain a list of approved lenders at the nearest HUD field office or on HUD's website.
Get an estimate of
how much the work will cost.
The amount of a 203(k) loan cannot be increased during construction, so it's essential to get an accurate estimate of how much the work will cost. For fastest results, get an estimate from a HUD-approved contractor or fee consultant. You can find approved consultants on HUD's website.
Get an appraisal.
Actually, you'll generally need two appraisals (both done at the same time): one for the current value of the home and another to estimate the value after the repairs. The loan amount may not exceed the lesser of either the value of the home in its existing condition plus the cost of repairs and 6 months' worth of mortgage payments; or 110% of the estimated value of the home after repairs. The amount of the loan is also subject to maximum FHA mortgage limits, which vary from place to place.
Find a contractor.
The 203(k) program requires that the repairs be performed by a qualified contractor. Most people opt to hire a licensed contractor (typically the one from which they got the estimate), but if you're qualified to do the work you can save yourself some money by doing it yourself. Keep in mind, however that you can only be paid for materials if you're doing the work yourself. If this ends up costing less than the contractor's estimate, the excess money can be used for additional improvements or it will be applied to the principal of the loan. Also make sure that you'll be able to complete the repairs within the maximum allotted 6 months after the purchase. If you won't be able to complete the repairs yourself, hire a HUD-approved contractor.
Close on the home.
If everything is approved, you can purchase the home with as little as 3% down. If you're unable to occupy the home immediately, you can use the extra six months of mortgage payments which may be included in your loan to pay the mortgage while you're also paying to live elsewhere.
Make sure to get
the work done on time.
You have six months after the purchase in which to complete the repairs. The repair fund is held in escrow and is disbursed in installments to the contractor (or to you, if you're doing the work yourself). A HUD-approved inspector must review the progress before each disbursement is made.
Get a final
Once work is completed according to the initial plans, get the final inspection. If there is money left over, it must be applied toward the principal of the loan.
The 203(k) program
is not for everybody.
For example, if you're solely looking to invest in the home and then "flip" it, you won't qualify, and you also won't qualify if the cost of the house plus repairs exceeds HUD's maximum mortgage limit in your area.
. If this is the case, there are some other options, including Fannie Mae's Homestyle loan and home equity loans on your existing home. A few private lenders also offer programs for these "handyman specials," but they have their own, often stringent, qualifying standards.
. A wide variety of repairs are eligible for the loan, including energy conservation and renewable energy upgrades and even moving an existing house onto the foundation of a home you intend to demolish.
. Even with the best planning and estimates, major home remodeling or rehab almost always costs more than you expect. As a rule of thumb, the 203(k) loans require at least a 10% contingency reserve for such unexpected expenses.
. The market value of a home depends largely on its location, so it's usually best to find a fixer-upper home in a desirable location, rather than one in an area with a depressed housing market.
· Don't bite off more than you can chew. Be sure that you can get the work done within the time limits set by the terms of the loan. If you don't, you may not receive the remaining repair proceeds and the loan could be payable immediately.
Keep in mind that
individual lenders are allowed to make certain stipulations that vary
from the guidelines set forth here.
For example, they may require that the work be performed in less than six months.