You find a neat fixer-upper, then learn that banks won’t lend until the repairs are done, but the repairs can’t be completed until the house is purchased. This catch-22 scenario can be solved by the Housing and Urban Development Department’s FHA-backed 203(k) “rehab loan,” growing in popularity because so many foreclosure purchases are in dire need of repairs.
This loan covers the cost of the home, plus money for repairs up to a maximum of $35,000.
To get the ball rolling, you’ll need the funds for the 3.5 percent required downpayment, and then find a suitable property. Your Realtor will prepare your offer, stating that you’ll be seeking 203(k) financing.
Next you’ll apply to an FHA-approved lender, including a sheet listing each repair and its cost. Finally, an appraisal is performed to determine the value of the home once the proposed repairs are complete.
Upon approval, you’ll have financed the home purchase plus all of your proposed repairs (there’s even a 10 percent to 20 percent “contingency reserve” included to cover any unforeseen improvements).
At closing, the seller receives the purchase price, and the remaining funds go into escrow, to be disbursed to the contractor as work is completed (within six months).
Real estate professionals support this loan program because it expands homeownership and revitalizes neighborhoods, but all you need to know is that it will get you into a very affordable home right now.
— Elaine Abercrombie, a broker with Abercrombie Fine Homes at Village Properties, is president of the Santa Barbara Association of Realtors. She can be contacted at elaine@elaineabercrombie.com.