One of the worst things that can happen to a house is to stand empty. Without anyone to keep an eye on the condition of a property small defects that could be repaired inexpensively become large defects costing significant amounts of money to remedy. This is the fate of the millions of foreclosed homes that litter the real estate landscape. Forclosure is a process that takes months to complete. At some point in that process the homeowner leaves or is forced to leave, essentially abandoning the care and maintenance of the property. The banking institutions, having taken millions of homes into an unwanted inventory have no interest in keeping the homes cared for or maintained. One point to always remember whether the home has been sitting empty due to foreclosure or any other reason-there will be problems that present themselves that would not occur in an an occupied property. Burst pipes, leaking roofs, mildew, wood devouring insects, or theft of the copper in the water supply lines are all common defects in vacant homes.
But, there are good buys to be had if you are willing to deal with the issues that come with these homes-particularly if you are paying cash and have cash on hand to fix the problems. This blog isn't about cash. This blog is about mortgages and finding a roadmap through what has become a confusing process. So-you have found a good buy on a foreclosed property but there is a little problem-the prior owner took the kitchen cabinets and counter tops with them. You don't have fifteen or twenty thousand in the bank to take care of the repairs and...even if you did...the lender from whom you wish to obtain financing isn't going to let you close on a property that is missing 80% of the kitchen. And guess what else? Even if you have the money to add what is missing, the bank that owns the property won't allow you to repair the property to meet your lender's requirements prior to closing. And...the lender who owns the property won't fix it either. Wait...let's review: My bank who is financing my mortgage won't close on the property unless there are cabinets, countertop, and a sink in the kitchen. Even if I ask Aunt Matilda to give me money to repair the kitchen so it meets my bank's requirements to close, the bank that owns the house won't allow me to repair the problems before closing, and the bank that owns the property won't repair it so they can sell it? Is that right? Do we have a circular firing squad going on? Yep, Sparky, you got it.
How does the bank that owns the house ever expect to sell it? Don't they know that most people have to obtain mortgages to buy a house? They do. They just aren't into rehab. What to do? What to do? Look for the cavalry-the US cavalry to be specific. As it happens, HUD using the FHA loan does have a solution. It is called the 203K loan. (Took me awhile before I realized it wasn't a retirment plan too.) It is a mortgage loan that will allow you to finance the repairs into the loan and hold the repair money in escrow so you can repair the house after you close. It's just that simple...well sort of...but it works.
There are more than a few rules that cover this loan. You will need the standard 3.5% down payment that FHA requires-and in this case it has to be your money-no gifts from interested parents or relatives. But to soften that blow, the down payment is on the house without the repair money in the loan. So if you are buying a $60,000 property and expecting to put $25,000 into repairs, your down payment would be 3.5% of the $60,000 not the $85,000. The house does have to appraise at repaired value that is at or exceeds the cost of the purchase price and the repairs. And, no sweat equity. You will need a bonafide contractor with an internet or yellow page presence, not your cousin Eddy who weilds a pretty mean paint brush. (Even if cousin Eddy is a bonafide contractor, the rules of the loan do not allow family members to be your contractor.) Also the money can't be used for structural repairs. So this loan won't work to repair floating foundations, room additions, truss repair or to shore up sagging floor joists. It will replace windows, faulty furnaces and air conditoning, reshingle roofs, buy appliances, or repair exisitng structures such as screen porches or decks. It won't build new decks or screen porches. And, there is a cap on the loan-$35,000.
So if your dream home is missing the furnace or has broken pipes, be sure to ask about the FHA 203K loan. Not every FHA lender has the product as many choose not to deal with it, but with the right buyer and the right property it is a terrific product.
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