Foreclosure Purchases and the FHA 203(k) Rehabilitation Loan Program
Posted by Benjamin Dona on Saturday, August 29th, 2009 at 8:34pm.
The FHA 203(k) Rehabilitation Loan program may be right up your alley if you are buying a foreclosure as your primary residence. That's because The Federal Housing Administration (FHA) is encouraging the use of its little known 203(k) loan which allows a primary owner-occupant* to borrow money for both the purchase and renovation of a property all in one loan. And, you only have to have 3.5% of the total purchase price (acquisition and repair costs) as the down payment. In addition, the program can be use to include cosmetic improvements as well as major renovations like replacing a roof or fixing up the properties plumbing or electrical systems.
The thing you must understand about the 203(k) loan program is that completing the application process will require a little more patience on your part. But, if the property is a great buy and needs some comprehensive remodeling to make it just right for you and your family, the additional time and paperwork aggravation may be worth the effort.
When purchasing and remodeling a home under this program, the property value must remain within the county FHA loan limit for the area once the rehabilitation or repairs are completed. The value is calculated by either adding the cost of rehabilitation to the original property purchase price, or as 110% of the appraised property value following rehabilitation, whichever is less. The final mortgage loan amount is based on the projected value of the property with the work completed. The advantage of this type of loan is that you can buy a home that needs a lot of work and you can complete the repairs after purchasing the home.
The following is a synopsis of how the FHA 203(k) Rehabilitation Loan Program works.
- A home buyer locates a fixer-upper and executes a sales contract after doing an analysis of the property with his/her real estate professional. The contract should state that the buyer is seeking a 203(k) loan and that the contract is contingent on loan approval based on additional required repairs by the FHA or the lender.
- The home buyer then selects an FHA-approved 203(k) lender and arranges for a detailed proposal showing the scope of work to be done, including a detailed cost estimate on each repair or improvement of the project. Find Approved FHA 203(k) Lenders in Your Area and Approved 203(k) Lenders in Bonita Springs, Cape Coral, Ft. Myers and Naples.
- The home buyer and the contractor meet with the FHA fee consultant to ensure that the rehabilitation work plans and cost estimates are complete and meet the 203 (k) program requirements.
- The appraisal is ordered and completed to determine the total value of the property after all renovations are complete.
- When the borrower passes the lender's credit-worthiness test, the loan closes for an amount that will cover the purchase price of the property, the remodeling costs and the allowable closing costs. The amount of the loan will also include a contingency reserve of 10% to 20% of the total remodeling costs to be used to cover any additional work not included or known about in the original proposal. The mortgage payments and remodeling work begins right after the loan closes.
- At closing, the seller of the property is paid the purchase price and the remaining funds are put into an escrow account to pay for the rehabilitation repairs and/or improvements. Escrowed funds are released to the contractor(s) during the construction process through a series of four draw requests for each phase of completed work. To ensure completion of the job, 10% of each draw is held back and a HUD-approved inspector must review the draw request and inspect the completed rehabilitation. The withheld 10% is paid after the lender determines the job is completed, sub-contractors have been paid and there is no reason for a lien to be filed against the property.
When all the work is satisfactorily completed according to the final inspection, the borrower provides a letter to the lender indicating that all the work is complete and the lender will reconcile the escrow account. If there are any monies remaining in the account, then the lender will use it to pay down the mortgage principal.
So, if you find the perfect home and it happens to need a little work, be sure to remember the FHA 203(k) Rehabilitation Loan Program. It just might help you get the home of your dreams.
*Note: This program is only available for primary owner occupied purchases. Second home and investor properties are not eligible for the program.
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