How to Get a Mortgage Loan for a Fixer
Here's a clever real estate dictum for you: Don't buy the best house
in a bad neighborhood; buy the worst house in a good neighborhood.
There are several reasons for this rule, but the main one has to do
with property values, which are determined in large part by the
surrounding homes. If you buy the best home in a bad neighborhood, your
home sets the highest price consideration in the area.
If you purchase a lower-priced home in a good neighborhood, you'll
pay less for it, and with improvements, you can greatly increase its
value. The higher-priced homes surrounding it will also buoy its value.
This doesn't necessarily mean you need to purchase a fixer. Sometimes
a small home in a good neighborhood offers a good value if there is
room to add to it. A fixer, however, presents you with the best
opportunity to quickly build equity.
The FHA 203(k) Loan
If you think it's impossible to get a loan for a house that is
uninhabitable, or needs a lot of work, think again. Not only is it
possible, there is even a loan that allows you to live somewhere else
during the rehab, while not having to worry about two mortgage payments.
The United States Department of Housing and Urban Development is the
umbrella agency for the Federal Housing Administration (FHA). You've no
doubt heard of FHA loans – which are low down payment loans that are
guaranteed by the U.S. government.
The FHA offers another program called the Section 203(k)
program, also known as Rehab Mortgage Insurance. Like a standard FHA
loan, this program guarantees the repayment of the loan. Where this loan
program differs is that it allows the borrower to finance both the
purchase and the cost to rehab the house all in one loan.
Two Types of FHA 203(k) Loans
FHA offers the standard 203(k) loan that pays for rehabbing a house.
Items such as a new roof, replacing plumbing, adding or replacing
floors, and major landscaping are among the type of work allowed.
The program also offers a streamline FHA 203(k) loan, which pays for
non-structural elements, such as painting, adding energy-efficient
appliances and new carpet. In addition, homeowners can tap into the
program to finance repairs required by an inspection report or to
perform other work needed to get the property ready to sell.
The maximum loan amount for the streamline program is $35,000.
Ways to Use the Standard 203(k)
While most borrowers utilize the 203(k) to rehab a fixer, there are
other ways to use the loan, as well. A homeowner can borrow the money to
convert a single-family home into a multiple-unit dwelling, with up to
four units. Or, the borrower can do the opposite – convert a
multiple-unit home into a single-family home. Finally, the 203(k) loan
can be utilized to move a house onto the property on which you've taken
out a mortgage.
Of course there are rules and stipulations to all of these
alternatives, which interested homeowners should take the time to look
into.
Dwelling Eligibility
FHA has eligibility requirements for the property. These include:
The dwelling must either be a single-family home or a multiple-unit building with a maximum of four units.
The dwelling must be at least one year old.
Condo projects are limited to the interior of the unit. Other rules apply for condos.
The cost of the project must be at least $5,000, but you are
prohibited from raising the value of the home to more than the FHA
mortgage limit for the area. You can find the limits for your area on
FHA's website.
Borrower Eligibility
This loan is for owner-occupants only. Investors, home flippers and the like don't qualify for the FHA 203(k) loan.
While FHA doesn't require a minimum credit score to qualify for the
loan, lenders do – and the score varies by lender. Wells Fargo, for
instance, dropped their minimum score requirement in February, from 640
to 600.
You must be a legal U.S. resident.
You will need from 3.5 to 10 percent of the loan amount as a down
payment. This is in addition to closing costs and the cost of mortgage
insurance.
The maximum debt-to-income ratio for an FHA backed loan is 43 percent.
Borrower requirements can and do change, so consult with a
HUD-approved lender for the latest changes. You can find a list of these
lenders on HUD's website.
- How to Get a Mortgage Loan for a Fixer
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