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Can a bank require 203k loan for a forclosed home?

We recently put an offer on a home.  The bank required that we obtain a 203k loan to repair a roof.  We read up on the 203k loan and are worried about the inspector saying to fix other things  (which will make us go over our maximum loan amount and the amount of money we can afford.  We read that if you can't fix the home the way the bank says that you go automatically into foreclosure yourself.  What should we do?
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February 14 2011 - Evanston
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Answers (4)

Yes, The bank can do that. All mortgage lenders for thier collateral/house to be in average condition or better. IF the roof is in such bad condition that it only has a life expectancy of 2 years and you are taking out a 30 year mortgage. Why would the bank want to extend credit on a property that is going to have issues with the roof in 2 years?

Another option to consider is to go back to the seller of the property and let them know that you can't get financing on this house due to the condition of the roof. They are going to have this problem with every other potential buyer unless buyer is paying cash for the house. Try to get them to get the roof replaced by the seller. IF they won't repair it they are going to have this issue with the next seller anyways.
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February 17 2011
Yes many homes now a days are in very poor condition which will require a cash buyer or 203K rehab loans.  Actually I believe in the 203K rehab loans.  They don't sound as bad as the media, realtors, etc.. make it to be.  Yes if the home needs substantial repair the home should be discounted to cover the repairs.  Find a home that needs repairs just figure out how much it will cost to repair/rehab the home.  For example, if you only qualify for 150K then look at a home that you could buy for $100,000 r
and repair with $30,000 to $50,000.
With the 203K loan you could have windows replaced, carpet, hardwood floors, appliances, furnace, and that's just to name a few.  Think outside the box.  If you could picture that worn out home fixed up then maybe it will be worth it.  The downside is that these loans take from 45 to 60 days to complete.  You actually meet a licensed and bonded contractor and discuss what will be needed for repair.  This loan is a HUD government loan and only require a 3.5% down.  Rates might be a slighly higher but still worth it when you get an updated home.  I provided a link for more information.
http://www.hud.gov/offices/hsg/sfh/203k/203kabou.cfm

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February 16 2011
You are correct to be concerned, particularly in Evanston. If the property is in poor condition you may be required to do more work, yet you probably should be factoring that into account anyway. Why would you want to buy a propery that is in bad shape and needs other work, but you cannot afford to do it? That sounds like a property that will suck you dry over time and be a financial drain.
You do not go into foreclosure just because you cannot fix the home the way the bank wants. If you cannot fix it the way the 203K loan inspector says to fix it then you just do not get the loan to begin with. Go find another property.
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February 15 2011
Many homes are in such poor condition that traditional financing cannot be placed.  A lender has the right (and responsibility to their investors) to require a home be in good condition before they secure it with their cash.  Of course, the home should be appropriately discounted from the market price to cover the cost of repairs as well as the special financing.

A 203K is often the first 'go to' loan because it is somewhat consumer friendly and relatively inexpensive.  Builders use commercial loans, lines of credit, some times hard money loans, but these are more expensive and typically require large down payments.

One way to mitigate your risk is to get multiple inspections done on the home prior to moving forward.  These should include pest, a whole house inspection, HVAC, roofing to start.

If that seems like too much effort, and it could be, move on and find a home with a good roof.
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February 14 2011
 
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Can a bank require 203k loan for a forclosed home?
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