Tag Archives: FHA loans

A Fixer-Upper Purchase Strategy

A Fixer-Upper Purchase Strategy

You are attracted to a house that is perfectly located but it just came out of foreclosure and needs a lot of work to make it habitable. To swing the deal, you need to finance both the purchase and the required repairs. How do you do that?

Getting the mortgage required to purchase a house is only one of the challenges facing the buyer when the house needs work. The second challenge is finding a way to finance the needed repairs. The standard purchase mortgage doesn’t do that because it is based on the lower of sale price or the appraised value of the home in its current condition.

An obvious solution is a second mortgage, but they are not available in the current market except where the first mortgage is too small to do the buyer any good. Second mortgage lenders are still smarting from the steep losses they suffered on second mortgages written during the go-go years leading up to the financial crisis. An unsecured personal loan would be extremely costly if it were available at all.

The solution to this problem is a mortgage on which the loan amount is based on the value of the property after needed repairs have been made. Then one mortgage would cover both a purchase and the repairs needed to make the house habitable. This is future value financing, and it is available through a special FHA program termed “203(k).” This program is available to both home purchasers and existing homeowners who want to rehabilitate their properties in conjunction with a refinance.

The Section 203(k) program is complicated because FHA as the risk bearer has to make sure that the future value of the property upon which the mortgage amount is based actually materializes. To protect itself, FHA requires an appraisal of the property’s value after completion of the planned rehabilitation, in addition to an appraisal of the property “as is.”

Further, before the mortgage is insured, the lender must create a rehabilitation escrow account that contains the money allocated for expenses. FHA has procedures in place to assure that draws against this account are properly disbursed and accounted for, and that the rehabilitation work is completed.

Lenders are encouraged to participate in 203(k)s by the insurance against loss provided by FHA. However, 203(k)s are more complicated and involve more paperwork than the mainstream FHA program, and participating lenders use specially trained staff. As a result, many lenders don’t offer 203(k)s. Lenders that do offer them charge a rate above that on standard FHAs — figure on paying about 0.25 percent more.

The borrower looking for future value financing must deal with multiple players. In a typical case, the real estate agent who shows a potential buyer a house in need of work will recommend a lender who will pre-approve the borrower for a 203(k). The preapproval is based on estimates of sale price and repair costs. The sale price estimate is provided by an appraiser selected by the lender who values the property on both an as-is and after-repairs basis. The repair cost is provided by a licensed general contractor who is usually recommended by the lender.

In addition, if the repair costs are more than $35,000, FHA requires the borrower to retain a HUD-approved consultant to help manage the process. Among other things, the consultant prepares the required architectural exhibits, and monitors the improvements at each stage. HUD provides a list of consultants and sets their fee schedule, but does not warrant their performance. Lenders will usually recommend consultants that they have worked with, and this is one case where a lender referral is likely to serve the borrower well. The consultant’s fee can be included in the mortgage.

Increased use of 203(k) in the next few years is expected. Millions of homes emerging from the foreclosure process will enter the market, and many of them have been neglected and need work.

Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania.

Buying is winning the lottery

With the current residential real estate market for buyers in the throngs of a literal feeding frenzy, due to the rising infestation of investor buyers, the buyer looking to buy a home for their family to live in is having massive competition.

While inventory is currently contracting and sales are on the rise, six months from now we will know for sure if the market will be positive–meaning that values will finally be officially on the rise. There are some areas that are seeing an increase in values.

I have several listings that range in the low price ranges of $200’s, to $600K — and  these are seeing multiple offers from investors and owner-occupied buyers.  This makes it tough on the buyer purchasing for a family as a first-time buyer who do not have a lot of money to put down. There are up to 10 offers in a matter of a few days on almost all properties now.

This scenario should continue making this a very frustrating time for the first-time,  FHA government & conventional low down payment, or Military Veteran no down payment buyer. This group has to compete with the “all-cash” and 20%+ down payment conventional loan buyers, who usually win due to the restrictions on condition of property by the government loans like FHA and VA, or the low down conventional investor guidelines.

So, how does the low-money-down buyer get in a position to win the property for the buyer who has to compete with the big money buyer? Make sure you are interviewing your perspective agent on how this process will be handled. In this market, this is necessary not only for sellers, but also for buyers. Repairs or a price reduction in a short sale can be done and I can show you how.

Experience is GOLDEN!! Properties having no equity to several liens, a bankruptcy, etc. will not close with an average or most experienced agents, whether representing a buyer or a seller. I have helped several listing agents while I represent a buyer get the property sold in these scenarios.

Whether buying or selling, you owe it to yourself to call me now. The time is now to buy and you will have the most success and satisfaction with the agent who can maneuver through the maze while leveraging you the best deal. I am here to serve you to make sure you WIN the LOTTERY!

Thank you for reading and God Bless.