If you’ve ever bought a home with a loan (as most homeowners do), you might remember that there were inspections and appraisals, and if you had an FHA, VA or other government-backed loan (as many first-time buyers do), that they have to approve the condition of the property as habitable, and it must have enough value to secure the loan amount.
In today’s market, this is where the problem comes in. Housing inventory in some areas can be heavily “distressed” as we call it in the real estate industry, which means lots of foreclosures and short sales. Because the sellers or previous owners of these homes were in dire financial straits, they probably didn’t keep up with the regular maintenance issues of their home. In some cases, there is even malicious damage and theft of appliances and health and safety systems in the home. These homes are priced in such a way as to reflect these insufficiencies, and are therefore very attractive to first-time buyers. But if you’re struggling to come up with the funds for a down payment and closing costs, how are you going to pay for repairs once you move into this dump, even if you can get the lender to loan funds for you to buy a house with no toilets?
According to federal law, lenders must make a commitment to neighborhood and community revitalization, and report to the government how they are carrying out that commitment. The 203(k) financing programs partner lenders, non-profit agencies and government agencies such as HUD to invest in areas and neighborhoods that been hard hit by declining influences such as high foreclosure rates.
Under Section 203(k), an owner-occupied home of 1-4 units is eligible for a loan to purchase the property AND bring it to acceptable living standards. The money can be used to add health and safety systems such as heating and air conditioning, plumbing, roofing, energy efficient windows, and electrical upgrades. It can also be used for upgraded (although not luxury) appliances, bath and kitchen remodels, room additions and fixtures. It can even be used to purchase property where a home must be torn down and a new one built.
How is this accomplished? Well, it’s a little more complicated than a standard loan. There are two appraisals in most cases, an as-is valuation and an improved valuation based on a work plan. The loan amount is based on the improved value and the required down payment from the buyer (3.5% for an FHA loan) is also a percentage of the improved value.
Several of the major lenders are funding 203(k) loans. If you’re considering buying a home that needs repair or remodeling, talk to your Realtor about finding a 203(k) lender.