203K FHA loan
Although the real estate market is starting to come back there are still a lot of good deals and distressed properties out there. Still with the cost of homes relativley low there are many home buyers out there that are still unable to qualify for a loan. This is especially true when it cames to buyers who can afford the 3 1/2% down payment for an FHA loan but cannot afford to have the necessary repairs made and even if they could the repairs would have to be made prior to the loan closing. At that point you have 2 options, either walk away from the deal or hope the seller is willing to pay for repairs. 99% of the time these real estate transactions fall through. Why? Well, that's simple. Most distresses properties are what they call REO meaning they are a Bank Owned Properties most likely from a foreclosure. Typical, when banks are trying to sell the property they want to sell it in AS-IS condition and since the property was foreclosured on they have already taken a loss and they are not willing to put any more money into the property so most of these properties are purchased by investors who have plenty of cash on hand to buy the properties outright and then make the necessary repairs.
Fortunately, there is a program out there where buyers can actually buy the property and close on the real estate without repairs being completed. It's called 203K FHA/HUD loan. In short a contractor can come in and provide a cost estimate to the buyer to do the renovations and bring it up the FHA standards. Once the estimate is provided to the bank they have an appraiser visit the property to confirm the repairs being proposed bring it up to FHA standards, any additional repairs the owner would like to make, and any repairs a 203K consultant recommend be done will appraise out when you add the cost of repairs to the asking price. Once approved the loan can be closed and the funds for repairs are placed in escrow account and as repairs are completed the contractor is paid. There are 2 kinds of of 203K loans. Loans under 35K in repair costs are what they call a 203K Streamline loan. Repair costs which exceed 35K are considered a 203K Rehab loan.
Whether it's a streamline or a rehab loan there is a mininum of 5K in repairs needed to qualify for such a loan and if there is structure repair needed or the cost of repairs exceed 35K the owner must hire a Certified 203K Consultant approved by the federal government to do a feaseablity study and cost estimate. The consultant will also be responsible for approving all draw payments the contractor is requesting and any change orders for unforeseen repairs thet may surface during the course of construction. In a sense the consultant is the bank's set of eyes in the field.
There is lot more to the process than just the highlights I have presented above, but it has to be your primary residence. If you are interested please give our office a call and speak with Glenn Botts a Certified 203K Consultant (A0988) for more details. We can also put you in touch with lenders who are approved to make 203K loans. Our office number is 321-676-0836 .