FHA Home Loans for Handyman Specials: Five Steps To Follow

By mortgagecreditproblems.com

If you'd like to buy a fixer-upper but don't have a wad of cash for repairs, consider getting an FHA loan to buy and repair the home. The Single-Family Rehabilitation Loan program, also known as 203(k), provides one sum for the purchase and cost of fixing up the property.

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The loan is designed to eliminate the Catch-22 situation you face with a conventional mortgage: You can't do repairs until you've purchased the home, but the bank won't lend money to buy the property until the repairs are completed.

FHA Loan Limits and Down Payment Requirements

Like other FHA loans, this loan provides financing with a low 3.5% down payment, and because the loan is guaranteed by the Federal Housing Administration, often you can qualify even if you have less-than-perfect credit. The mortgage also has to meet FHA loan limits, which range from a low of $271,050 to a high of $729,750 in expensive markets like San Francisco.

Some state housing finance agencies have designed programs to assist buyers who use the FHA rehabilitation loan program. Check with your state's housing finance agency to see if it has such an offering.

FHA Home Loan Process for Fixer-Uppers

Here's a five-step rundown of the FHA rehabilitation loan process:

1. Work with a real estate agent to do a feasibility analysis of the property and prepare a sales contract stating that the contract is contingent on 203(k) loan approval.

2. Prepare a detailed proposal that includes cost estimates of each repair and home improvement project. Cost estimates must include both materials and labor, even if you plan to do the work yourself. If the cost of the work to be done exceeds $35,000, you have to work with a HUD consultant, who prepares what is called a work write-up. This write-up gets incorporated into the appraisal of the property.

3. Shop for FHA-approved lenders to get the best mortgage rate, and apply with a competitive lender. If you're approved, the loan covers the purchase price of the home, remodeling and closing costs, and a contingency reserve of 10% to 20% of the total rehabilitation costs to cover any repairs not included in the original proposal.

4. When the loan closes, the seller is paid off, and the remaining money is put in an escrow account to pay for repairs.

5. After the loan closing, mortgage payments and remodeling begin. The contractor gets paid during construction through a series of draw requests for completed work, and 10% of each draw is reserved until after the work is approved in a final inspection.

FHA 203(k) loans can be complicated--make sure the loan officer you work with has done them before, answers your questions, and returns your calls promptly.


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