FHA program funds fixers

Big loan, small downpayment among incentives

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Jan. 19, 2010

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Big loan, small downpayment among incentives

Dian Hymer
Inman News

Investors have been taking advantage of low interest rates and discounted prices to buy run-down foreclosure properties, sometimes 10 or so at a time. They fix up the properties enough to be rented until the market turns, which could take years. When the time is right, the investor puts the finishing touches on the improvements and hopefully sells for a profit.

This can be a risky strategy for an inexperienced homebuyer. It's hard to compete with investors who make all-cash offers. Investors usually have a team of contractors who can do the fix-up work. If they're working on several properties at once within close proximity of one another, it's more economical than fixing up one property at a time.

Financing the improvements to fix up a property in today's market is difficult. Construction financing is virtually nonexistent. Most conventional financing requires a 20 percent cash downpayment. Before the subprime mortgage meltdown, fixer buyers often used a home equity line of credit (HELOC) to finance improvements.

Today, you would need to have enough equity in the property to tap this kind of money. For instance, if you made a downpayment equal to 50 percent of the market value, you might be able to find a lender that would give you a HELOC for up to 30 percent of the value.

HOUSE HUNTING TIP: Another option that doesn't require a huge outlay of cash it to use the FHA 203K mortgage program that is designed specifically to provide financing for repairs and renovations to single-family residences. It is available only to owner-occupants, not investors. The maximum mortgage amount varies with location. It's currently $729,750 in high-cost areas like the San Francisco Bay Area.

The program works like this: Suppose you buy an $800,000 home using your savings for the cash downpayment and a $729,750 loan from FHA. FHA 203K loans are available with as little at 3 to 5 percent cash down, plus some cash reserves to pay contractors' initial payments. The interest rate is a little higher than it is on a standard FHA loan.

When you make your offer, be sure to include a 45-day financing contingency and a 60-day closing. The seller won't be happy with a 45-day financing contingency. However, if the listing has been on the market for some time with no offers, your chance of acceptance is good.

After your offer is accepted, you and your real estate agent walk through the property and create a wish list of all the repairs and improvements you'd like to make.

Then a contractor and FHA inspector preview the property and either approve or disapprove the items on your wish list. They might even add something to the list that they think needs to be done, like a new roof. Let's say the approved amount for rehab is $40,000.

An appraisal is done giving two values: the property in its "as is" condition and the property after the improvements have been done. To get approval, the cost of the improvements ($40,000, in this case) plus the "as is" price can't exceed the appraised value of the property after the renovations are complete.

After approval, the $40,000 for improvements is deposited into an escrow or trust account. Up to five releases can be made during the course of renovation. The work must start within 30 days of closing and be completed within six months. For more information about the FHA 203K Rehab Program, click here.

THE CLOSING: The FHA 203K program can also be used to refinance and finance renovations.

Dian Hymer, a real estate broker with more than 30 years' experience, is a nationally syndicated real estate columnist and author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide."

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