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Many buyers these days are on the prowl and ready to seize the amazing opportunity out there to buy homes at astronomically low prices and at incredibly low interest rates. Yet with the current inventory expected to drop as we approach the cooler months, how can they find the perfect home?
There is great news for those prospective buyers who come across the almost perfect home that requires just a few changes to make it the one. What’s more, if you are already in a home that needs some major repairs, you can refinance the property AND get some work done on the home without having to pay for the repairs out-of-pocket. Homeowners typically use this loan for major renovations or repairs like fixing a leaky roof, replacing a furnace, redoing bathrooms and more.
Put Little Money Down Then Fix The Property Up
People who choose to finance with FHA loans are already enjoying a host of benefits – and rolling in home renovations, repairs and rehab into their loan is one of the top advantages of financing with FHA. Not only are they able to purchase a home with very little down – as low as 3.5%, but also they can avail the opportunity to transform the property into exactly what they want it to be.
Keep in mind that the borrowed amount of a 203(k) loan must be at least $5,000 in order to qualify but even a small bathroom shower stall installation costs starting at $2,000 so the bills can add up fairly quickly.
How the 203(k) Loan Works
A potential buyer finds a home valued on the market at $250,000 that would be perfect if only it had an updated kitchen and renovated bathroom. The homebuyer and their realtor would then conduct a marketability analysis to determine the extent of the improvements, rough cost estimate of the work, and expected market value of the property after completion of the rehabilitation. Once a sales contract has been signed with the provision for securing 203(k) financing, the buyer would then apply for the 203(k) loan, which is a loan federally insured by the US Department of Housing and Urban Development (HUD). The potential buyer and their mortgage consultant would discuss the property and the proposed improvements, the costs of the renovation, and any necessary contingency reserve to determine the total amount necessary for financing. Next, the buyer will consult a contractor to prepare a work write up and request an estimate for their proposed renovations and repairs.
For a standard 203(k), the buyer, HUD consultant, and appraiser will meet at the property to inspect and review the proposed changes, the contractor’s estimate and anything else that would impact the appraiser’s estimation.
One of the best features of the FHA loan is that a borrower is able to finance as much as 96.5% of the value after renovation. Where under normal circumstances, the home appraiser would determine the value on properties in the area and the sales figures from the previous 6-months for similar homes in that same area, with a 203(k) the appraiser determines the current value of the property and takes into account all of the renovations to determine an after-improvement valuation.
Where Do We Live During Renovations?
Homebuyers are legitimately concerned about where they will reside while construction takes place. As part of their purchase and rolling in the cost of renovating a property the 203(k) loan accommodates living expenses if the borrowers are unable to inhabit the home for the duration of renovations. Up to six months of mortgage payments can be rolled into the loan which creates an opportunity for homeowners and buyers who cannot otherwise afford these changes to a home while carrying a mortgage payment. At end of the construction period, their home will be worth much more AND they will have been able to afford the mortgage payments during that time.
On our example of the $250,000 home, let’s say that we need about $35,000 to renovate the kitchen, a bathroom plus have some exterior landscaping done. When you roll in $35,000 to the current cost of the home $250,000, plus the six months of mortgage payments on that loan at about $16,000, the amount needing refinanced is $310,000. The appraiser determines the after-improvement value to be $310,000, and you have a home that you can finance for with a minimum down payment of only $13,495 (3.5%). When the loan is closed, the proceeds designated for the improvements and repairs are placed into a Rehabilitation Escrow Account by which the homeowners request draws to pay for the construction and improvements during the renovation process. You can purchase and finance the creation of your dream home for as little as 3.5% down – without having to shell out any additional funds up front for renovations!
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If you are looking for the perfect home and think you just may have found it, save a few changes – talk to your Realtor about the possibility of a FHA 203(k) loan. You may be able to get everything you dreamed of without breaking the bank!
For further information please click here! >>
Realtors please check out Gateway's 203K program here! >>
