Monday, April 8, 2013

How to Rehab a Home with HUD’s 203(k) Program

Earlier this week, we mentioned that foreclosures are becoming more difficult to buy—prices are going up, we’re seeing bidding wars, and federal funds are being used to rehab many of the houses that could have made for easier buys on the market.  A story in the Chicago Tribune indicated that even those properties that “need a major overhaul” are in higher demand.  However, it’s still true that a “fixed-up foreclosure costs far more than one with a long list of repairs needed.”

Interested in buying a fixer-upper?  Although some advocates insist that there’s too much paperwork and prep needed to buy one of these properties, you may be interested in learning more about the Federal Housing Administration’s (FHA) 203(k) mortgage financing program.  Through this program, you may be able to afford a home that is still in need of some serious work.
What is the 203(k) Program?
The FHA, which is actually part of the Department of Housing and Urban Development (HUD), administers a number of “single family mortgage insurance programs,” which “operate through FHA-approved lending institutions.”  In short, HUD doesn’t make direct loans to potential homebuyers, but it has specific programs through which potential homebuyers can apply for loans through FHA-approved lenders.
The 203(k) program is a unique one that deals with loans for homebuyers who seek to rehab properties.  In fact, it’s the primary program administered HUD that helps with funding for “the rehabilitation and repair of single family properties.”
According to HUD, the 203(k) program is “an important tool for community and neighborhood revitalization,” as well as a significant tool to expand “homeownership opportunities.”  Often, when a potential homebuyer is thinking about purchasing a house that requires significant repairs, these homebuyers end up in a “catch-22” situation.  According to HUD, many of these homebuyers find themselves in a situation where “the bank won’t lend the money to buy the house until the repairs are complete, and the repairs can’t be done until the house has been purchased.”
The 203(k) program might be able to help in these cases.  It’s designed to help you secure a loan to purchase or refinance a home that will include the cost of the repairs and improvements in that loan.  It’s an FHA-insured 203(k) loan, and it’s “provided through approved mortgage lenders nationwide.”  Notably, it’s only available for people who want to occupy the home they’re buying—you’ve got to be an owner-occupant in order to be eligible.
How Does the 203(k) Loan Work?
First, you need to have a downpayment of approximately 3.5% of “the acquisition and repair costs of the property.”
After you’ve saved up for the required downpayment, HUD explains that the 203(k) loan then includes these steps:
·      The homebuyer will locate the “fixer-upper” and execute a sales contract with a real estate agent.  This contract will make clear that the homebuyer is seeking a 203(k) loan, and that the contract is contingent upon the homebuyer’s loan approval.
·      The homebuyer will select an FHA-approved 203(k) lender and submit a detailed proposal, including cost estimates for repairs and improvements.
·      An appraisal will be completed to determine the post-renovation value of the property.
·      If the buyer is approved, the loan will close.  It will include a “contingency reserve of 10 to 20 percent of the total remodeling costs” in case the homebuyer needs to pay for extra work that wasn’t accounted for in the initial proposal.
·      At the property closing, the seller will be paid, and the additional funds will be placed in an account to pay for repairs.
·      After closing, the mortgage payments and remodeling will begin.
·      The remodeling funds will be released to the homeowner “during construction through a series of draw requests for work that is completed.”
While some of these steps can be a bit tricky, the 203(k) program may be exactly what you need to purchase and rehab a foreclosure.  An experienced attorney can help you with this process.  Contact us today.
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