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
- Get loan pre-approval with a lender that does 203(k) loans
- Search for bank owned homes with our free and easy online search engine
- We go together to see in person the homes that interest you
- 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
- Make an offer with FHA disclosures and 203(k) indicated
- Offer accepted
- Contractor quote
- Loan process
- Home purchase closing
- Contractor begins work
- First payment to contractor made
- Repairs completed
- Final inspection
- 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:
It is a simple question with a difficult answer. How low will the bank accept for a short sale offer? As with most things, it depends. First of all, the seller of the property is the owner, not the bank. The seller must accept the offer before the bank will even see it? But, since the seller walks away from the closing without any money going to him, price is not his first consideration.
A short sale is when the seller owes the bank more money than the home he owns is worth, and the bank agrees to accept a lower amount as payment in full for a sale. The bank will sometimes ask for a personal note from the seller to cover the difference, but the seller will want to avoid this if possible. The bank will decide to approve this arrangement only if it makes financial sense. The threat to the bank, is this home will go to foreclosure if a short sale cannot be arranged. If the seller has the income to continue paying the mortgage and is doing so, that threat is lower. In some cases, a short sale can be arranged without the seller missing any mortgage payments, and the sellers credit is much better preserved. A difficult dance, but possible if an owner without financial hardship wants to move.
For the majority of short sales, the bank has not been paid in a while. If the house goes to foreclosure, the bank is facing high expenses, and the prospect of owning real estate. Bank owned property tends to decline in value over time because it starts in an uncertain condition, remains vacant for long periods, and is roughly and poorly maintained. Banks make money by lending money. They must have a reserve of cash to lend money. They do not want to own real estate. So they sell it; and they are not likely to get a good price for it. If the house is sold in a short sale, the home is still someone’s home. The home is not usually vacant. The home is at least modestly maintained and not mistreated. The home is sold in an orderly process, and the bank receives cash at settlement. This is a lot of benefits in favor of allowing a short sale.
So what will the bank accept for a short sale? Answer these questions:
- What is the condition of the house?
- What is the demand in the local market?
- How much does the home appraise for, or what is the broker price opinion (BPO)?
- How long has the home been on the market and at what price was it offered?
- How well has the home been marketed?
- Are there any existing offers?
- What is the financial condition of the bank and the banking industry?
- What is the competition?
- What is the absorbtion rate?
- What are the recent sold prices including REO sales?
- How many payments are late?
- How much is the balance of the loan?
- How many lenders are involved?
- Is the mortgage insured?
- Who owns the mortgage?
- How well is the short sale package presented?
- Who is the negotiator?
- How many files are on the negotiators desk?
- Are there any contract contingencies?
- Is this a cash offer?
- How certain is the bank that the deal will go through?
We can try answering these questions, and we do, but is there another way to answer the main question?
The above list is the theoretical way of trying to compute an answer. I like to tell my buyer clients, that the only way to know for sure if a seller (or bank) will accept some amount of money is to make an offer. A real offer is binding on the buyer. It shows the question is not idle talk. The bank in it’s own way is answering those same questions above to evaluate an offer. So an offer means it is worth the trouble for the bank to spend the time and money to figure out just how much it will accept. If there are multiple banks, and mortgage insurance, then there are many people that have to agree on the price. That takes negotiation, and none of that negotiation will take place without a real offer on the table. So the answer is to find out by negotiating with the bank.
And, we can use short sale sold data as a guide to our negotiations. The following two graphs show as a percentage of original list price the final sales price for short sales in Baltimore County for the last year. Each dot represents a sale. Each sale has it’s own unique situation. For instance there is one sale at 30% of original list price. This is an as/is home with renovations half unfinished. There are also sales over 100% of list price. This can mean the price was listed very competitively at the start.
There is nothing magic to the original list price, but it gives us a number to work from for this blog post. For a real transaction, we would research the above questions for the specific case.
- Find closings for a specific bank
- Find the loan balance
- Analyze the local market
The discounts buyers are getting can be quite dramatic. If you were to look at the original loan balance, or the highest property sale price, then things really start to get interesting.
There is a new program that is nowÂ available for delinquent mortgage holders. The program is called Streamlined Modification Program, it is an attempt to help as many as possible to keep their home from foreclosure.Â The program is available to loans owned by Fannie Mae, Freddie Mac, Hope Now and itâ€™s 27 service partners.
The mortgage servicer will work with the homeowner to adjust the monthly payment to be 38% of income.Â The monthly payment would be principal + interestÂ + taxes + (homeowners Â insurance, mortgage insurance, homeowner dues, condo dues).
There are several ways that they can make the adjustment:
- One way is to extend the term, up to 40 years.Â
- Another way is to reduce the interest rate.Â They can reduce it to as low as 3%.Â This reduction will last for five years and then the interest rate will adjust up by 1 % per year until it maxes at the current market rate or the original interest rate whichever is lower.
- They can even reduce the principal balance to the current market value for the house.Â This would only be available if the principal loan balance exceeds the current market value.Â The reduction of the principal balance is not completely forgiven, it will become a balloon payment that will be due at the end of the loan term. And if the owner sells prior to the end of the loan term, it would be due at settlement to satisfy the loan.
Any or all of the methods can be used to get the monthly payment down to the 38% of income.
Criteria to qualify:
- The loan must be at least 90 days delinquent and
- The amount owed must be at least 90% of the homes value.
The programÂ started on December 15th, and I have seen banks offering it to their delinquent mortgage holders by way of a letter.Â So go ahead and open up that correspondence from the bank!Â And if they do not sendÂ a letterÂ about the program, give them a call.Â Â They have been offered an incentive forÂ every loan that they can enroll into the program, they are going to try to make it work.Â
The mortgage holder shouldÂ call their servicer and ask about it.Â
The servicer will ask for
- Proof of income, and amount of income.
- A statement of hardship. Mortgage holder should be willing and able to explain the circumstances that lead to falling behind, (for example such as job loss/change)
- They mightÂ askÂ monthly expenses.
Here are some links that go into detail about the program:
The FHFA’s (Federal Housing Finance Agency) press release about the program and FAQ:
I have set up a detailed spreadsheet to help my clients who are in a short saleÂ position to figure out if they would be able to have their loan adjusted to an affordable payment.Â I would be happy to help anyone else who is contemplating it, just give me a call or email.Â TheÂ loan servicer can also helpÂ to figure out if the loan can be adjusted to be affordable.Â The most important step is to get started,Â and work through it one phone call at a time.
Spread the word and help folks save their houses.Â Think Stability.
We can also helpÂ find rentals.Â And we can help to sell aÂ house in a short sale if the loan modification isn’t possible.Â A short sale is better on theÂ credit report than a foreclosure.Â IfÂ someone you know could use our help contact us.
Photo credit, Jeff Turner