As a Realtor it is critical today to be knowledgeable about distressed properties with so many short sales & foreclosures among us. These houses come in all shapes and sizes, and typically come with a list of repair issues as well. However, many agents have not had the opportunity to learn about or use the loan programs that can make the purchase of a distressed home easier to navigate.
Renovation loans to the rescue. A renovation loan is a mortgage that allows the borrower to secure funds above the base loan amount to repair or upgrade a property by financing the repair costs in. The home is appraised at the “future value” based on the base price of the home plus the costs of repairs per the agreed upon contractors bid. The future value must be supported by comparable sales as any normal appraisal would be. The loan closes in its current unrepaired state. Immediately after closing the borrower and contractor can begin work on the home.
There are 3 main types of renovation loans:
1. FHA 203K Streamline Renovation loan (limited repair)
2. FHA 203K Standard Renovation loan
3. Conventional Renovation loan
The 203K Streamline program allows for repairs up to $35,000 with FHA specific allowable repairs. No structural repairs are permitted on the streamlined program.
The FHA 203K Standard program has no minimum repair amount but is limited to the FHA loan limit for your area like all FHA loans. However, a Standard FHA 203K loan can be used for more extensive repairs such a structural remediation. This loan does require an FHA certified inspector to evaluate and approve all repaired items prior to occupancy.
These two FHA Renovation programs allow for the standard 3.5% down payment minimum and follow the traditional underwriting parameters as a regular 203B FHA loan. The standard Upfront Mortgage Insurance Premiums apply as well as the monthly premiums. This is an owner-occupied program only.
The Conventional Renovation loan functions much like the FHA loan, however this program can be used for both owner-occupied properties as well as investor owned. Fewer lenders offer this program but it can be a great option in lieu of the 203K. A minimum of 5% down is required for owner-occupied properties and typically 20% down for investors. Check with your lender as these guidelines are subject to change.
To find out more about the Renovation loan programs, please feel free to contact me at chris@themortgagegenius.com or call me at 704-277-4463.
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Chris hit upon the major points for the FHA 203k loan. Just as it is important to use a lender who knows how to do the 203k, it is equally important to use a contractor who knows what they are doing with the 203k. There is a database of Certified 203k Contractors located at the 203k Contractor Directory on http://203kContractors.com.