Bank Owned Property, Foreclosures, Short Sales…Odds are the Property is not in Move in Condition.

The reality of today’s inventory is that a fair amount are distressed sales.  Essentially meaning the previous or current owners are facing financial difficulties.  When people are having financial difficulty they are forced to make decisions on what to spend on and what not to spend on.  Maintaining a home that you cannot afford to stay in, is usually pretty far down on the list.  The result… a good amount of homes on the market have been neglected and need some updating.

Since most folks believe what they read and hear on the news…you would think that getting a mortgage is next to impossible (it’s not)…and getting a mortgage to include additional funds to update the home will never happen (It will).

In the coming years FHA 203(K) and Fannie Mae/Freddie Mac Renovation financing will become more common place.  They have been around for years.  Since home equity loans have not been as easy to come by they are being dusted off.  Both Programs work very Similar.  Your loan amount is based on the purchase price or Current value of the home Plus the cost of the improvements.  I am currently working on a 203K loan that the buyer is paying $145,000 for the property and putting an additional $45,000 of work into the property (New Roof, new Furnace, updating the Kitchen and Bath as well as a few other cosmetic improvements).  Very rough numbers…I am giving the borrowers a mortgage of $190,000 and putting aside $45,000 for the work to be completed.  This home is likely to appraise for $250,000 after the work is complete.  They are getting a great deal (personally I think the listing agent under valued the property as is).

The FHA 203(K) loan program is slightly different than the Fannie/Freddie and 203(K) streamline programs as it requires a hud 203(K) Consultant to do what is known as a 203K work write up on the property.  The work write up provides a detail description as well as cost estimates for the work that needs to be completed on the home.  Fannie and Freddie and the 203(K) Streamline program only require a contractor agreement to estimate the cost of the repairs.  Personally I like the idea of having an independent 3rd party give me an estimate on the work I am looking at having done, it would give me piece of mind to know that what I am paying for the work is reasonable.

After the loan closes the additional funds are put in escrow and disbursed as work is completed.  The number of disbursements will depend on the amount of work that is being done typically there are 3-7 disbursements.

If you are looking at a property that is in need of repairs, financing options are available.  I would suggest seeking out a local loan officer to discuss your options.  These programs are a little more complicated than standard financing so make sure the loan officer has real experience with these loan programs. 

October 20, 2008