203(k) Loans Take the Fear out of Fixer-Uppers

With home prices still elevated by short housing supply this spring, Minnesota homebuyers are finding it more difficult than ever to find property. Prices might come down later this year, but that’s not soon enough for the buyers who need to make a move now. A “fixer-upper” could be the answer these buyers have been looking for.

A fixer-upper!? That is a lot of work, right?

We get this question a lot. Yes, fixer-uppers can be a lot of work. But there is a lot of financial justification for motivated homebuyers to opt for a home that will need some TLC or personalized cosmetic updates.

And there are a lot of properties that fall into this category. Sometimes homes have outdated layouts, appliances and fixtures. In other cases, such as is often the case with foreclosed properties, the property has suffered significant wear and tear.

Some updates will be inexpensive (new paint, refinished floors) but others will be more costly (changing layouts, upgrading appliances and utilities). But did you know there are special loans for home rehabilitation programs?

The 203(k) loan program is perhaps the best option. The program was established by the Federal Housing Administration to help homebuyers repair older and/or dilapidated homes they wish to buy and occupy. The program lets those borrowers finance both the home’s purchase price AND necessary repairs that are scheduled to take place after closing.

A few key considerations if you’re thinking about applying for a 203(k) loan:

– The homebuyer must live in the home. The 203(k) program is not for investors that want to purchase, fix up and then quickly resell the property.

– The 203(k) program all sorts of repairs, such as bathrooms and kitchen remodels; room additions; second story additions; structural changes and repairs; roofing; flooring; decks and patios; finished attics and basements; environmental remediation; energy efficiency updates; and home accessibility improvements for disabled residents. However, these loans do not cover luxury upgrades, such as the installation of a hot tub or swimming pool.

– All types of properties are covered by 203(k) loans, including:

  • Single-family dwellings.
  • Multi-unit properties that house no more than four-families.
  • The residential portion of a mixed-use, commercial/residential property.
  • An existing renovation project that has been finished for at least one year.
  • A home that will be torn down, but where the foundation will still remain.
  • A home that will be moved to a new foundation.

– A special rehab loan, known as the “Streamlined 203(k)” can be used for a home that requires only non-structural repairs, such as installing a new roof. A Streamlined Loan will provide up to $35,000 for these rather simple, straightforward non-structural improvements.

– The more traditional rehab loan, known as a “Regular” or “Full” 203(k) loan, is meant for properties that require major structural repairs. These loans are combined with the purchase price of the home, and can go as high as 110% of the home’s expected valueafter the improvements. A simple example: The home you’re interested in purchasing is for sale for $300,000. Renovations will cost an estimated $50,000. Once the renovations are complete, the home is expected to be worth $400,000 (a net increase in value of $100,000 after renovations). In some cases, a bank would lend up to $440,000 to ensure a borrower has access to the funds necessary to complete this project.

– Under the 203(k) loan program, construction must begin with 30 days of closing on the property and work must finish within six months.

– If homeowners cannot occupy the home during construction, the Full 203(k) loan program allows borrowers to finance up to six months’ in mortgage payments to temporarily live elsewhere.

There’s no doubt that buying a fixer-upper is a scary prospect! Watch any home improvement show and you’ll see there are all sorts of complications that can arise, especially if you start tearing walls down.

Yet with the Minnesota housing market as hot as it is today, the 203(k) loan program provides a great option for those who don’t want to get into bidding wars for recently renovated properties. Taking on some of the work allows homeowners to customize their property and can add significant value over the long-term. What seems like a ragged old shack today could just well turn out to be your dream home by the time you’re done!

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