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Ruben Lopez: Purchase and Renovate — All with One Loan

The 203(k) government-backed program offers financial advantages for buyers

Are you looking for a way to purchase or refinance a home and make improvements — all with one loan? Then the 203(k) loan may be the answer.

Ruben Lopez
Ruben Lopez

A federal Department of Housing and Urban Development 203(k) renovation loan is a government-backed loan program for buyers who want to purchase or refinance a home and make improvements — all with one loan.

These loans are perfect for a bargain hunter who has spotted a fixer-upper or a foreclosure in need of immediate repair, or for someone who has found a home that would be ideal if, for example, it had a third bedroom and a second bathroom.

A renovation loan is a great tool for homebuyers, allowing them to consider purchasing older or foreclosed homes that would otherwise sit longer on the market. This gives you the option to look at properties that may be more attractively priced because they are in need of repair.

In today’s market, saving money is a huge decision point for many buyers. This is a very versatile loan that not many people know about.

Renovation loans provide the money to both purchase the home and finance the home’s renovation. With one loan, there is only one application, one set of fees, one closing and one monthly payment. At closing, the house is paid for, and the repair money is put into a special account for disbursement as repairs are completed.

Improvements can include anything that adds value to the home, such as a room addition, new carpeting, landscaping, plumbing, roofing or a new kitchen. The loan can also be used for energy-efficiency improvements that qualify for tax credits under the stimulus package.

Another great advantage of a renovation loan is that it provides borrowers a loan based on the increased property value after renovation. But that’s not the only financial upside. The required down payment on a renovation loan can be as low as 3.5 percent.

As a tax-deductible first mortgage, the renovation loan usually will feature a lower interest rate than a second mortgage, and improvement costs can be spread over the term of the loan. This can prove a bargain because many buyers finance improvements with more expensive consumer credit. Also, the loan can provide financing for up to six months of mortgage payments if the house is not occupied during construction.

— Ruben Lopez of Prospect Mortgage is a public-relations coordinator for the Santa Barbara Association of Realtors.

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