Great Home But Needs A New Kitchen, Damn!

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   How many times have you heard someone shopping for a home to say, “We saw the perfect house, perfect neighborhood, but needed (insert) a) a new kitchen b) another bathroom c) central air d) all new carpets e) all of the above?!

   If you’re getting a bank loan to buy a home for say $200,000 with a 3.5% down FHA insured loan, the bank isn’t going to give immediately give you another loan for $50-100,000 with of upgrades for you to do yourself with or without a contractor. Yes, there is the argument that you can get a second mortgage later, but why not do it all at once?

   There is a loan out there called an FHA 203K which is perfect when you find an almost perfect house. It works basically like this:  You get a contractor(s) to bid out the work you’d like to have done on the property once you get it under contract.  The bank has an appraiser go to the house and determine so see if the $50,000 in improvements will make the house worth $250,000. If it looks like a good plan, then the bank gets you a $250,000 loan at closing (still with the 3.5% down payment) and you close on the home. You have six months to complete the work via the contractor(s) the bank has approved.  The contractor completes each step of the work and the bank sets up a ‘draw’ in order to get him paid each step of the way. 

   This loan is particularly attractive if the home is great but needs say, just a new roof in order to pass FHA standards for a home loan, and where the seller has no equity in the property to make any repairs on behalf of the seller.

    What I’ve found is that this loan takes a few weeks longer to close than a normal transaction because of the work bids that must be reviewed. Also, you must use contractors who have gone through a short process to get approved by FHA and the bank. You can still use your favorite contractor but they must be approved by the bank. It’s very difficult to use an out of town ‘on line’ lender for one of these loans as the ‘draw’ process must be local to get contractors paid quickly during the work. 

     This is a terrific loan to get work done on a home that needs minor or major work done on it. I’ve found it’s a great help when I find a buyer a foreclosure where the AC has been ripped out, the carpets are crappy, and the bathroom needs updating. The bank who took the property back from the seller doesn’t want to do a thing but get rid of the property from its inventory.  The interest rate on an FHA 203K loan is slightly higher than a regular FHA loan, but worth it if you don’t have extra money to do rehabilitation to a property once you’ve put out the 3.5% down payment for the loan.