Want to Buy a Fixer-Upper? FHA Loans Can Help

By Barbara Marquand
Mortgage Credit Problems Columnist

If you want to buy a home that needs some work but you don't have the cash for repairs, a Federal Housing Administration loan program might be the best tool for the job.

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The FHA's Section 203(k) program lets borrowers wrap the cost of repairs into the mortgage, so the home loan finances both the price of the property and its rehabilitation.

Usually if you want to buy a house in need of repair you'd have to obtain interim financing to purchase the home and pay for the construction project, then a permanent mortgage to pay off the interim loans, which often have high interest rates and short amortization periods. The FHA rehab loan lets you get a permanent mortgage to finance everything.

Mortgage Calculation: Cost of House Plus Cost of Repairs

The amount of the mortgage is determined by the cost of the work and based on the projected value of the property after the work is completed. The loans are insured by the FHA, so rates are competitive and the same FHA low down payment requirement applies.

After the loan closes, the seller is paid for the property, and the money for repairs is put in an escrow account. The contractor you use to do the work must be licensed and comply with FHA requirements. As the work gets done, the contractor is paid through draw requests on the escrow account, with a reserve held until the work is approved in a final inspection.

There are two types of these loans. FHA's Streamlined 203(k) program lets you finance up to $35,000 into the mortgage to upgrade the home before moving in. The 203(k) mortgage program allows you to finance more than $35,000 in repairs. Keep in mind the total mortgage must fall within the FHA lending limits, which vary depending on where you live.

Use Free Mortgage Calculators

You'll need to work with a lender approved to do FHA 203(k) loans, and you'll want to shop among lenders to get the best deal. Use free mortgage calculators to assist with your research.

Use a loan comparison calculator to compare quotes between lenders and a mortgage payment calculator to determine your monthly mortgage payment for varying loan amounts and interest rates. Don't forget about closing costs. A mortgage closing costs calculator lets you estimate how the closing costs that will be due when the loan closes.


http://www.hud.gov/ / http://www.nls.gov

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