FHA Rehab Loans – A Viable Solution For First Time Home Buyers
First time home Buyers are in a very reserve position right now – there are $ 8,000 tax credit available that can be used towards down payment and closing costs and, in many markets, homes that are more affordable than they have been in years.
Due to the number of foreclosed properties on the market, first time home buyers have options that require very little up front investment. While there are a number of foreclosed homes that are move-in ready (require little to no work), some of the best deals available today are with troubled homes that do require fixing up prior to move-in. Distressed homes can be purchased in cities across the United States for as much as a 75% discount.
Most people think that only savvy real estate investors can purchase troubled homes at huge discounts, but there's a program available from the US Department of Housing and Urban Development (HUD) that few first time home buyers are familiar with called the FHA 203 (k) reconstruction loan.
Why would you need to use a rehabilitation loan? Well, conventional or even traditional FHA mortgage lenders will not provide loans on homes that need considered repair. These lenders would expect the repairs to be completed prior to lending.
So what is the 203 (k) loan? Briefly, the 203 (k) loan program was created for the purpose of neighborhood revitalization and expansion of home ownership opportunities. With a 203 (k) home improvement loan, home buyers can purchase a single family residence, condo, townhouse, or even a multi-family (up to 4 units) home and have both the purchase price and cost of rehabilitation covered by the loan (with a minimum down payment, currently at 3.5%). Buyers are provided with 6 months to complete the rehabilitation work (a minimum of $ 5,000 worth) – things such as:
- air conditioning, plumbing, heating, and electrical system replacement
- installation of well, septic system or connection to public utilities
- roofing, flooring, tiling, and carpeting
- elimination of any health and safety hazards (eg mold, termites, lead paint)
- structural alterations (finished attics / basements, installation of additional bath (s))
- major landscape and site improvement
For a home that needs considerable improvement you may be thinking to yourself "What if it takes me 3 months to get all this work done? Do I have to make payments on the loan?" Great news for you! The answer is no. The buyer is able to include up to six months of payments in the mortgage while the home is unoccupied and work is underway.
Let's take a moment to define who HUD deems as a first time homebuyer because the truth is that you do not really have to be purchasing your very first home. HUD deems a first time homebuyer as an individual or couple who have not owned a home during the three years immediately preceding the date of the loan application.
In order to be balanced, lets discuss some of the shortfalls of the 203 (k) loan. Things to consider include:
- You must either be extremely handy to do the work yourself or find a reliable contractor to complete the work. If you're going to deal with rehabing a home, you must be prepared for inconveniences such as (1) things costing more than you expect, (2) things taking longer to complete than originally promised, and (3) dealing with unreliable workers .
- Speaking of things costing more than you expect …. good repair estimates are absolutely essential. The mortgage amount can not be increased to cover additional expenses after the loan has closed. The good news is that if the home needs considerable work, your cost estimate in the loan application must include a contingency reserve to handle unexpected costs, however its important that your cost estimates be reliably accurate to avoid costs greater than even the reserves can cover.
- You must ensure that your home meets the stricter requirements of the FHA inspectors – no shortcuts! Get the work done the right way the first time.
These shortfalls should not scare first home buyers away from purchasing distracted homes. These troubled homes are some of the best values in the real estate market today and if you have the patience and diligence to end a renovation, this may be an excellent option for your home purchase.
For more information on the FHA 203 (k) program, you can visit the US Department of Housing and Urban Development website at HUD.gov.