If you are planning to buy a fixer-upper home that requires substantial investment for repairs and refurbishment, there is a Federal Housing Administration (FHA) loan program to help with the financing of both the purchase and rehabilitation of the home. For some home buyers, these loans, also known as FHA 203(k) loans, can lower costs and reduce the time and hassle of arranging financing. As a result, financing your fixer-upper with a 203(k) loan can have a number of potential advantages, including the following.
1. A 203(k) loan results in permanent financing upfront. A 203(k) loan is based on the projected value of the property once the rehabilitation work is done. Therefore, it includes the estimated cost of the rehabilitation work. Without a 203(k) loan, a buyer might have to take out a mortgage to purchase the property; then obtain a separate, short-term loan to fix it up; and finally, once the work is done, refinance the mortgage with a larger loan in order to repay the short-term refurbishment loan. This process can be time consuming and somewhat risky, since it is dependent on the availability of financing at affordable interest rates for what could be an extended period of time.
2. A 203(k) loan could result in cost savings, since the interest rate on a short-term, home rehabilitation loan may be higher than on the permanent FHA financing.
3. Using a 203(k) loan can save time and aggravation, since it requires obtaining just one loan, rather than three.
Here are a few of the requirements to qualify for a 203(k) loan.
First, a property must be a one to four family unit, and it must be at least one year old.
Second, a property that will be razed (or has been demolished before purchase) can qualify for a 203(k) loan as long as a portion of the existing foundation will be used for a new structure. Also, in some cases a home can be moved from another site to the mortgaged site.
Third, a condo unit may qualify if it is in a condominium project that has been approved by the FHA.
Fourth, 203(k) loans also may be available for some mixed-use properties.
Fifth, 203(k) loans can be used to refinance an existing lien on a property and to rehabilitate the property.
Sixth, while luxury improvements do not qualify under the 203(k) program, the repair, refurbishment and modernization projects that do are extensive.
This article provides a brief and, necessarily, somewhat general overview of the 203(k) program. However, the program is more detailed and complex than can be described here. For more information about 203(k) loans, go to the Department of Housing and Urban Development (HUD) website at www.hud.gov/offices/hsg/sfh/203k. In addition, seek the advice of a real estate loan specialist knowledgeable about this program before proceeding.
Lynnley Browing, www.nytimes.com, Mortgages – A Little-Known Loan Program for Fixer-Uppers – NYTimes.com
www.hud.gov, Rehab a Home W/HUD’s 203k Rehab Program