Even though Oklahoma’s economy has held up better than the rest of the nation’s, there are still many distressed properties for sale through for foreclosures and short sales. We get calls constantly from buyers wanting a “bargain” – maybe a HUD home or a foreclosure. The problem is that many buyers looking for a bargain don’t have the financial ability to renovate or repair a distressed property, and most mortgage programs, including those providing FHA-backed loans, require homes to pass inspection prior to loaning money on the homes. That leaves many buyers unable to qualify for a “fixer-upper” deal on a home.
FHA recognizes this and offers a program called 203(k). It allows a home buyer to borrow enough money to purchase AND renovate a home, all rolled into one loan. Prior to closing, the buyer gets estimates from building professionals on the cost of renovating the home. At closing, the extra money is put into escrow and the new homeowner has six months to complete the renovations, which are paid from the escrow amount. The homeowner ends up with a completely renovated home with very little out-of-pocket expense.
203(k) – How It Is Different
Most mortgage financing plans provide only permanent financing. That is, the lender will not usually close the loan and release the mortgage proceeds unless the condition and value of the property provide adequate loan security. When rehabilitation is involved, this means that a lender typically requires the improvements to be finished before a long-term mortgage is made.
When a homebuyer wants to purchase a house in need of repair or modernization, the homebuyer usually has to obtain financing first to purchase the dwelling; additional financing to do the rehabilitation construction; and a permanent mortgage when the work is completed to pay off the interim loans with a permanent mortgage. Often the interim financing (the acquisition and construction loans) involves relatively high interest rates and short amortization periods. The Section 203(k) program was designed to address this situation. The borrower can get just one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work. To minimize the risk to the mortgage lender, the mortgage loan (the maximum allowable amount) is eligible for endorsement by HUD as soon as the mortgage proceeds are disbursed and a rehabilitation escrow account is established. At this point the lender has a fully-insured mortgage loan.
For more information contact Kay or one of our recommended lenders.