"Buying & Rehabbing Properties” By Amy Bonis
– Certified Mortgage Planner – Raleigh NC
There are several types of Rehab loans. The article below talks about FHA 203K Rehab loans for primary residences. Please contact Amy directly for more details. Preapproval is necessary with these awesome products.
Over the last few years, there has been an increase in the number of distressed properties that have hit the market. These properties, foreclosures, short sales, REO’s, HUD properties are potentially really good deals but many buyers are unable to get traditional bank financing. You can usually buy distressed properties for less. The idea is to buy the property at a discount, fix the property up so that your new appraised value, after renovations, is higher than the total money you have into it.
The biggest issue consumers and realtors have in dealing with these properties is how to finance them and where to start. In some cases, people feel overwhelmed with the project. It’s important to work with a qualified contractor and also a lender who’s familiar with these type of remodeling or repair loans. In addition to making a nice profit, you can get a great deal of satisfaction from remodeling/ rehabbing a property.
The vast majority of primary residences that are bought or refinanced this way are financed through a 203K rehabilitation loan. These types of mortgage base the loan amount on the “after renovation value” (ARV) not the current value of the property, so you know you’ll have sufficient cash to finish the rehab project. Of course, you still have to qualify for the total mortgage amount. You can also do these types of loans on investment properties through our Fannie Mae Homestyle Renovation loans.
It’s important, before embarking on this type of project, that you work with a local mortgage expert to make sure that you personally meet the specifications on this type of financing (for example, you may need a specific credit score such as a 660 or 680 score…and you need to meet specific income to debt ratio requirements). Whether you want to remodel your existing home or buy a new home for yourself, these loans do not require a lot of equity at all. You can finance up to 96 – 97% of the new value of the property or even more. The interest rates are great and are 30 yr FHA fixed rate loans. When you are buying an investment property, you will need to have about 20% down payment on the total after repair value of the property. The rates are also 30 year fixed rate loans. The interest you are paying on your renovation costs are part of your first mortgage and are therefore tax deductible.
There are two types of 203K loans for primary residences. There’s the Streamline K (for cosmetic work, with total costs not exceeding $35K) and there’s the consultant K loan. This “Full K” or Consultant K loan is typically used for homes that need repairs more than $35K or that require structural repairs. The Hud Consultant/Full K loan allows for more extensive work to be done and a specially appointed consultant helps supervise and protect you throughout the process.
- Consider replacing the locks to make sure vandals can’t get into the property when you are in your rehab stage. Clean up obvious debris from outside the home.
- Notify the police dept of your intentions. They may be willing to patrol the area more. Everyone wants a nice looking neighborhood. Consider leaving the exterior lights on 24/7.
- Get multiple bids from contractors before starting your project. Always check references and the Better Business Bureau. When deciding on what to start with, consider renovations that will increase the value of your home such as kitchen and bathroom updates. 203K loans do not typically allow DIY work, but instead require a professional to complete the work.
- Consider putting up something (for example, fabric on the windows) so that nosey neighbors, vandals can’t see into the home.
- You want to start the rehab with the interior of the home (unless you have foundation or roof issues, particularly those involving water damage).
- If there are things you need to order, for example replacement windows, order those sooner rather than later due to the wait time.
- If there is painting involved, painting the trim first is a smart idea. You can mask the trim by using a masking machine and use an airless sprayer for the actual painting. These sprayers are something to always have for various projects and they are not that expensive (maybe $300- $400). You can save hours of time.
- New light fixtures and faucets are indicators of when a house was last updated…so pay attention to what you choose when remodeling your home.
- When buying flooring, usually put down the flooring last and consider a neutral color. People can easily paint but flooring is harder to change moving forward.
- Work on the outside landscaping last, after you’ve completed the other things in the home. Curb appeal is always important. Especially in resale value.
It is really important with the current market, that you are formally approved for a loan before you go shopping for your home. It’s a mistake to look ONLY at foreclosures, instead look at everything that is available in your preferred, approved price range, to get a good idea of what’s out there.
Forbes recently ranked our area as the #3 Boomtown in the Country! Our local real estate market is now moving pretty fast and it’s critical that you actually have a formal, real loan approval BEFORE you go property hunting. Have fun and enjoy it. Getting discounts on homes now has become more difficult and this strategy will allow you to, hopefully, buy at a discount and design the house the way you want it to be. As a last thought, if you’re planning on selling your existing home it’s also worth considering remodeling using a 203K loan ahead of listing it.