How To Finance A Fixer-Upper

December 14, 2016 admin

In many home purchase transactions where the subject property is in need moderate repairs, borrowers, and their Realtors, find themselves in a Catch-22 situation – banks won’t lend money to buy the house without the repairs being made, and the repairs can’t be made until the home has been purchased.

Enter HUD’s 203 (k) Streamline Program. This loan will enable the borrower, with a down payment as low as 3.5%, to obtain financing that will cover the acquisition cost, plus the costs of making necessary repairs and improvements. The repair work will need to be performed by a licensed contractor, and the plans need to be prepared and approved by the lender during the initial underwriting process. The borrower can obtain up to $35,000 for these repairs, and draw funds from an escrow account established by the lender at the close of the transaction to pay the contractor at the completion of the repairs. This loan affords the borrower up to 6-months to complete the work, and the final disbursement will only be made after a HUD-approved inspector verifies that the repairs stipulated in the contract have been completed. These repairs must meet HUD’s Minimum Property Standards, and all necessary permits must be obtained to meet all applicable building codes.

An FHA 203k Streamline loan is a great way for borrowers to obtain financing to complete non-structural repairs to a property they own or are purchasing. The Streamline program has the same underwriting criteria as a standard FHA loan. If used appropriately, especially with the high number of REOs on the market that need repairs and are priced accordingly, this loan will enable borrowers to get into a house with as little as a 3.5% down-payment, develop equity, and improve their neighborhoods, one house at a time.

Eligible repairs under the 203 (k) program include, but are not limited to the following:

Repair/Replacement of roofs, gutters and downspouts
Repair/Replacement/upgrade of existing HVAC systems
Repair/Replacement/upgrade of plumbing and electrical systems
Repair/Replacement of flooring
Minor remodeling, such as kitchens, which does not involve structural repairs
Painting, both exterior and interior
Weatherization, including storm windows and doors, insulation, weather stripping, etc.
Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwave ovens
Accessibility improvements for persons with disabilities
Lead-based paint stabilization or abatement of lead-based paint hazards
Repair/replace/add exterior decks, patios, porches
Basement finishing and remodeling, which does not involve structural repairs
Basement waterproofing
Window and door replacements and exterior wall re-siding
Septic system and/or well repair or replacement

Under the right circumstances, these loans can be a real benefit to borrowers who are unable to cash flow needed repairs. The final loan amount is based upon the After-Improved Value of the property.

A recent 203 (K) transaction that we had been involved in demonstrated the overall value of the program, and enabled the borrower to gain instant equity in the house. The house was bank-owned, had been vacant for at least a year, but was in a good neighborhood. The borrower liked the property and saw opportunities to repair the house; but, he would not have been able to cash-flow the repairs or devote the time necessary to complete the repairs himself.

As the transaction unfolded, the borrower’s instincts were right on target. The repairs that were done included the installation of new appliances, a new HVAC system, a new tankless water heater, new carpeting, new windows, and a new garage door.

The home inspection did not identify any issues not addressed by the planned repairs, and the appraisal determined that the after-improved value of the house will provide the borrower with more than 10% equity in the property. This loan really can provide home buyers with the ability to find a deal on a house and finance necessary repairs and improvements to gain equity, without too much of their own sweat.

Sure, the loan does require some additional work for the loan originator and real estate agent, and may require 30-35 days to close, but under the right circumstances it is a very good product.

Please feel free to contact us with any questions regarding the FHA 203(K) Streamline program.