Buying a fixer-upper and improving it can build instant equity in a home. The Federal Housing Administration (FHA) and the Housing and Urban Development (HUD) have programs in place to loan buyers money to fix the home up without having to access an improvement loan and a mortgage loan through conventional means, a complicated and expensive process.
Selecting a mortgage for any home may be one of the most critical aspects of buying a home. When looking at a fixer-upper, some lenders will not even consider lending on the home because it may not be up to underwriting standards. Under conventional financing, buyers would have to get two loans on the property, one for rehabilitating it and the other to serve as the permanent mortgage. The interest rates on these loans can be high, keeping some families or individuals from buying a fixer-upper.
However, FHA and HUD have opened up loan programs for people to use to fix up a home, whether it’s detached or attached. The agencies work with private lenders and, upon loan approval, will fund an escrow account for the rehabilitation of the home and guarantee the mortgage loan.
HUD and FHA Programs
The FHA is part of HUD; it insures loans generated by private lenders for homes across the U.S. that fall under specific price ceilings. In the San Francisco Bay area, the mortgage ceiling for a single-family home is $729,750. Under the FHA guidelines, buyers can borrow money under the 203(k) loan program that will allow them to use the funds to fix a home up before they take possession of it, instead of creating two loans, one for acquisition and the other for improvements.
Two appraisals serve as the basis for the mortgage and repair fund. The first appraisal is for the home as is; the second appraisal is submitted after the buyer has determined the cost of repairs. The appraiser takes into account the improvements that will be made to the home; the FHA mortgage and the amount put into the 203(k) escrow fund will be based on the last appraisal.
Types of Improvements
None of the 203(k) funds can be used for luxury items in the home. Improvements can be made to improve the energy-efficiency of a home, painting, flooring, additions, and even decks. Energy conservation and repairs related to the health and safety of the occupants have priority among all the improvements that the 203(k) program funds.
Types of Homes Covered
Both detached homes and condominium units are eligible for the 203(k) program. In the case of a condo, the funds must be used exclusively to fix up the interior of the unit. Exterior maintenance is part of the condo association’s responsibility. A condo eligible for the 203(k) must be on the list of FHA’s approved condo projects, which involves a separate process that the condo association or the original developer or builder of the project must initiate.
All detached homes that fall under the mortgage limit for the FHA insurance program in the buyer’s area are eligible for the 203(k) funds. People who pay cash for a home can also apply for 203(k) funds to fix up the home or improve its energy-efficiency up to six months after acquiring it.
Applicants for the 203(k) funding need to submit a site plan of the home, an interior drawing and the estimates and bids for fixing it up. The bids can be made by contractors or architects. If the homeowner plans to do the work herself, the bid needs to include an allocation for labor for that activity, just in case he is unable to do the work.
Besides the application for funding, a report on the current condition of the home needs to include its condition with regard to safety, termites and other infestations, the condition of the roof and the heating and cooling system.
- Federal Home Loan Bank San Francisco: News Release
- Housing and Urban Development: Rehab a Home w ith HUDs 203(k)
Jackie Johnson is a published writer and professional blogger, and has a degree in English from Arizona State University. Her background in real estate analysis prepared her for objective thinking, researching and writing.