Home-rehab dream ruined? Try an FHA loan

Unfortunately, for those who want to pursue a 203(k), the number of lenders that work with the program has been limited, so the interest rate is usually a little higher, Glavey says. "Not every lender wants to roll up their sleeves and get involved in repair work." But this may be changing, as he says the FHA lender approval division in Washington, D.C., now has record numbers of lenders seeking FHA approval. (A lender with FHA approval doesn't necessarily have to participate in the 203(k) program.)

But Porsia knows of lenders that "hate to use the program because they get bogged down in paperwork." That paperwork can mean a longer waiting period before closing, so she wouldn't recommend the program to impatient buyers. But Glavey says, "It shouldn't be an inordinate amount of delay," provided the buyer uses good contractors.

That has been Sosinski's experience. Buyers of her properties who used the streamlined 203(k) typically close in the normal 30-day period, she says. "However, buyers do need to be persistent in getting their bids together. If you have a buyer who is lax about doing their part of the loan, it can delay things." Since buyers can be charged $100 to $150 a day for not closing on a foreclosure property on time, there's some built-in incentive to keep moving on the bids.

Buyers must also be prepared to fork over the minimum down payment based on the total of the sale price, plus the estimated cost of repairs, Mosier points out.

She also cautions about the lender's right to build in a "just in case" fund, with the buyer paying interest on it during the first six months, whether it's used for repairs or not. HUD refers to this as a "contingency reserve," and a 10 percent add-on to the estimated rehab cost is required for properties older than 30 years. But when the scope of work is "well-defined and uncomplicated, and the rehabilitation cost is less than $7,500, the lender may waive the requirement for a contingency reserve."

If you're 203(k) ready

A visit to the HUD website's 203(k) page is a good starting point for more information on the program. The resources include a detailed description of eligible properties and improvements. While 203(k) loans can't be used for luxury items and improvements that do not become a permanent part of the property, items such as painting, room additions and decks are allowed, even if the home doesn't need any other improvements. Information on maximum mortgage amounts, fees and the application process can also be found at that site or by phone at (800) CALL-FHA.

Getting in touch with an FHA-approved lender is the next step. It can be helpful to find a real estate agent who is experienced with 203(k) loans, Porsia suggests.

And while dreaming of your new home, just be sure to keep it real. In Glavey's experience, "buyers sometimes have a false expectation that they're going to get the Taj Mahal after the work is done."


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