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How do you buy a house that needs repairs before a bank will lend money?

September 27, 2009 by  
Filed under Featured

Home Repairs Needed

Most people can’t pay cash for a home, even if it is a discounted foreclosure property. That means you need a loan. But, banks don’t want to lend on a home that is not livable. So does that mean you can’t buy distressed properties? Are the deals off limits?

The Federal Housing Administration (FHA) has a loan program just for this situation. It is called a 203(k) loan. These loans are designed to help improve homes and neighborhoods. However the process is quite involved. You need many expensive professionals to help you through the process. You will need plans approved. The money is released as the work progresses and you meet project milestones. It is a process designed for large projects.

For many the red tape is daunting. FHA later realized there was a need for a simpler process. They developed the Streamlined 203(k) program. It won’t work for all projects. There are loan limits, and the scope of the work is limited. It is the 203(k) but simpler. You are limited to $35,000 in repairs. But for many of the homes out there that is enough money to complete the project. The biggest issue is the repairs can’t be structural or involve termite damage and stay within the Streamlined program. For that you will need the full 203(k) loan and process.

Here is what FHA says about the Streamlined 203(k) loan program:

What improvements are eligible under the new Streamlined (k) program?

The Streamlined (k) program is intended to facilitate uncomplicated rehabilitation and/or improvements to a home for which plans, consultants, engineers and/or architects are not required. The Streamlined (k) program includes the discretionary improvements and/or repairs shown below:

  • 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

What are the minimum and maximum amounts for repair costs under this program?

Given the need for homeowners to make minor repairs without exhausting personal savings, and in consideration of the increasing cost of materials, the minimum repair cost of $5,000 is eliminated and the ceiling is now raised to $35,000. This revised maximum repair/rehabilitation amount recognizes the cost of making older homes more energy efficient. Note that as described below, when the repairs exceed $15,000, the mortgagee must perform or obtain an inspection to determine that all listed repairs were completed.

If you are interested in homes that will require repairs, then keep this program in mind.

The likely process for streamlined is

  1. Get loan pre-approval with a lender that does 203(k) loans
  2. Search for bank owned homes with our free and easy online search engine
  3. We go together to see in person the homes that interest you
  4. Once you have narrowed your search to a house you might pursue you need to figure out how many dollars of repairs it will take
  5. Make an offer with FHA disclosures and 203(k) indicated
  6. Offer accepted
  7. Contractor quote
  8. Appraisal
  9. Loan process
  10. Home purchase closing
  11. Contractor begins work
  12. First payment to contractor made
  13. Repairs completed
  14. Final inspection
  15. Final payment to contractor made

Take the next step. Contact us for lenders that do 203(k) loans and get pre-approved.

Here is the full document from FHA that documents the program:

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