Getting a loan for a house can be difficult, but trying to convince a bank that you are the person who can fix up a property can be even more difficult. A do it yourself (DIY) property can be a great investment under the right circumstances, so learning that part of the market is a great move. If you are unsure of how to get a loan for a house that needs repairs, then you have come to the right place.
What is the major problb with banks and DIY property?
Banks often chase their tails when it comes to DIY properties: They do not lend the money to buy properties until repairs have been completed; however, the repairs cannot get done until the property purchase is finished. Unless you are an all cash buyer, you will have to find a way around this problb.
What if I am an all cash buyer?
Even if you have cash to pay up front for a property, you may still get more value out of a mortgage. Saving 80 percent of your monies to put it into repairs and upgrades may create value that outpaces the interest on the monthly payment. Even if this is not the case, if you are planning to stay in the home for less than 10 years, taking on a mortgage is often advantageous because the shortened timeline does not allow for as much interest to compound.
What is the 203k loan program?
The 203k program from HUD is designed specifically to own a piece of real estate that is in need of repair. The major difference between the 203k and other loan programs is the purpose of the loan funds: The cost of repairing the property is rolled into the loan amount. The 203k is insured by the Federal Housing Administration (FHA) and may also be used to refinance a property that is in need of repairs.
How does the 203k stop the bank from chasing its tail?
A conventional loan without funds to repair the home triggers the situation mentioned above: The bank does not want to pay for a property that has not been repaired, but the repairs cannot be done until the house is bought. The 203k loan repairs and buys the house at the same time.
It is possible to finance the repairs on a home using a conventional loan and a bridge loan or interim financing; however, this is a complex situation that may end up costing more in fees than the 203k loan package. The interim packages will likely need to be directed individually, with funds for the actual purchase, another line for the repairs, and another line in order to pay off the interim loans. The interest rates on these short bridge loans are usually much higher than normal mortgage programs, and they are definitely higher than the 203k loan rates.
How do I get a 203k loan?
After a potential buyer finds the right fixer upper property, a feasibility analysis is conducted. The sales contract is executed, stating the buyer is looking for a 203k loan. This contract will usually be contingent on the approval of the loan based on the needs of the lender.
The buyer sends this contract to the chosen lenders along with a proposal that will detail the repairs that need to be done and the cost of doing thb. The home receives an appraisal from the lenders in order to determine the approximate value of the home after the changes are made.
If the lender sees value in the contract and the repairs, then it may choose to close the loan contract for the amount that will cover the purchase and the repairs. These loans will usually include a contingency reserve that is used to cover any extra work that will be required in order to fully execute the contract: This contingency reserve is usually between 10 and 20 percent of the total repair and rbodeling costs.
If there are any rbaining funds at closing after the seller is paid for the property, then the rbainder goes into escrow for any additional repairs that the house may need during its rehab period. With all of the money in its proper place, the rbodeling and the mortgage payments begin at the same time. There are some limitations on the amount of money and time that can be spent on repairs;Â the total cost cannot exceed six mortgage payment, and the repairs cannot take any longer than six months.
The contractors who are actually completing the repairs are paid through draw requests. A percentage of the draw is always held back by the lender until all liens on the property are take care of.
Should I get a 203k loan?
As the prbier program for borrowers who are looking to buy and upgrade a property simultaneously, a 203k loan can give you leverage as well as financing. If you are trying to get away from the problbs that normally accompany a fixer upper, then a 203k loan is one of your best options. Make sure that you do business with a reputable 203k lender for best results, and be sure to pick a real estate agent with experience in properties that need to be improved.
2 Point Highlight
It is possible to finance the repairs on a home using a conventional loan and a bridge loan or interim financing; however, this is a complex situation that may end up costing more in fees than the 203k loan package.
There are some limitations on the amount of money and time that can be spent on repairs; the total cost cannot exceed six mortgage payment, and the repairs cannot take any longer than six months.
