Buy That House: The Fix-up Loan
Have you been looking for a house for some time now, but you have not found the one that is just right for you?
It could be for any number of reasons that the houses that you are seeing do not meet your requirements.
- The layout is all wrong;
- The kitchen cabinets and counters are old and warped;
- The baths were in style back in 1945;
- You would be embarrassed to bring your friends and family to the place;
- The windows are of the old and energy wasting single pane variety;
- The furnace looks like the space capsule;
- The hardwood floors would be nice if they were sanded and buffed;
- The walls need to be painted after you scrub off years worth of cigarette deposits;
- The basement is dark, damp, and downright spooky;
- ... And, yes, unfortunately, the list can go on and on.
Certainly, you do not want to buy someone else's problems related to their lack of maintenance or a house styled to their preferences in design. Who has the time or the money to deal with these issues?
But wait. There may be a solution. You may be able to get a house, which meets your wants, needs, and desires. You may be able to have a house that is within your budget. You may be able to overcome the problems, which were created by these neglectful homeowners.
Indeed, you may be able to meet your objectives and at the same time actually purchase one of these homes, which have just left you disappointed and wanting for more.
The solution: The FHA 203K loan. Basically, this loan will allow you to purchase one of these less than desirable homes, fix it up, and still stay within the values for homes in that particular neighborhood within which you are looking.
Here are some general statements about using this type of loan:
- First, if you purchase one of these homes, then you can expect the price to be lower, than if the house were in good condition. The appraiser will definitely consider the value to be lower than the better houses. So a house that has the potential to be worth $200,000, for example, could be purchased for let's say $100,000 or a number, which reflects the amount of work, which is needed.
- Second, the work which needs to be done, in order to actually qualify for an FHA loan, plus the work, which you would like to have done to make the home your own is determined. Let us say for our example that the cost of this work would be $75,000. Notice that the total of the purchase price and the fix up cost are $175,000 rather than $200,000. Typically, one can expect to pay less than the nice house price, because there are very few buyers if any who will want to take on this endeavor without some profit or equity involved. However, even if there were no equity at the completion of the project, remember that your other objective was to have a house, which meets your requirements.
The basic steps to purchase a home by this method are as follows:
· Work with your lender to determine the amount of house that you can afford and payments, which would be in your comfort range. With this information, you can determine the price range for homes that you can afford;
· Work with your Real Estate Agent to find a property. Even if you are using a FHA 203K loan, you will still want to look in the neighborhood of your choice, look for houses, which have sufficient living area for your needs, and are within the cost and value parameters, which were established with you and your lender. It is important that your Real Estate Agent have some knowledge, although they do not have to be an expert, of the cost of various home improvement projects;
· When you find a house that will meet your requirements, prepare an offer to purchase. The offer must state that you will be using an FHA 203K loan. There should be a feasibility contingency which is to determine the full scope and cost of the repairs;
· Once, you have a ratified contract, you will start your feasibility study. This step may require several experts. These experts will be perform the following activities:
o 203K HUD Consultant: Walk-through with a visual inspection to determine if the property has any chance of meeting the cost requirements. If the numbers do not work, then the contract should be terminated at that point.
o Home Inspector: An inspector will look at things in more detail than, the 203K Consultant. For instance, the inspector will pull the electric panel and examine for any not to code, unsafe, or outdated wiring. If the inspection uncovers problems, which were beyond your original repair estimates, then you may need to recalculate to determine if the numbers can still be managed. If not, then the contract should be terminated;
o 203K HUD Consultant / General Contractor: Return to the property for a more detailed examination. At this time, he will prepare a report, which itemizes, with costs, those things, which will be done. It may be worthwhile to bring your Contractor with you for this visit. It is your Contractor who will need to agree to the pricing that goes onto the 203K HUD Consultant's report;
o FHA Appraiser: The appraiser will look at value in two ways, one the value of the property in its current condition, and two, the value of the property in its fixed up condition. Also, the appraiser will make certain that the report from the 203K HUD Consultant includes conditions related to Minimum Property Condition Standards;
o Termite Inspector: FHA will probably require a termite certification, but the termite inspection is not necessarily needed upfront. Between the FHA 203K HUD consultant and the Home Inspector, you should get a good idea as to whether this should be done upfront or not.
o Lender: The Lender will review the report from the FHA 203K HUD Consultant to assure that all of the numbers still work. If so they will process the paperwork.
· If everything is still within budget after all of the inspections and appraisals, then the deal will go to settlement and the Buyer will take over ownership of the property. Notice that it is still the house, which needs work.
· Per the terms of the 203K Loan, the work must be completed within 6 months and should be overseen by a General Contractor. Also, it is preferable that any work that is to be done be by licensed contractors, however, it is possible for the Buyer to perform some work such as painting, although it is under the eye of the General Contractor.
· The General Contractor should understand that he does not get paid upfront. He gets paid in phases after various stages of the work are completed. As each stage is completed, The FHA 203K HUD Consultant and the Buyer examine it and then sign off if it is okay before the General Contractor gets his money.
The Buyer cannot move into the house until the house meets occupancy requirements. It is possible that, depending upon the improvements, the Buyer can move in from the start or possibly not until the project is complete.
The loan amount is based upon the purchase price plus the cost of the estimated repair costs, as prepared by the FHA 203K HUD Consultant. If the actual cost is less than estimated, then it increases the equity, but does not reduce the payment.
Since some degrees of repair will preclude the Buyer from moving in to the property right away, the FHA 203K Loan has a provision, whereby up to 6 months of payments can be financed right into the loan. With this feature, a Buyer is not paying for rent and a mortgage payment at the same time.
This is the basic procedure for a FHA 203K Loan. Of course, there are other details and the procedure could deviate on any given deal.
That's it. You can get the home of your dreams and in your price range and all from someone else's mess.
Call Ron Trzcinski at 410-935-5844 for more information.
Michael D. Klijanowicz 
