Most real estate agents have tales of clients who just can’t seem to look beyond a home’s minor flaws, be they ratty floors or sagging screens. Then, there are those clients who can envision the possibilities of a house that’s seemingly being held up by a prayer.
If you fall into the latter category but are short on cash, here’s a solution: a government-backed loan that covers not only the purchase price of the home, but the cost to rehab it as well. It’s a loan provided by the Department of Housing and Urban Development, known as the Section 203(k) Program.
The 203(k) loan is best known for allowing the borrower to rehab and repair a home. But it has other uses as well. Borrowers have used the loan to:
- Convert single-family homes into multifamily dwellings, with up to four units.
- Convert multi-units to a single-family home.
- Move a house to purchased land.
If you’ve found a house that requires just a bit of work and not an entire rehab, HUD offers a 203(k) streamlined program. This program covers improvements, upgrades or repairs with costs that don’t exceed $35,000. Some of these improvements may include a kitchen remodel, interior paint and new carpet – ideal for the homeowner wanting to spiff up a home before putting it on the market or the buyer who wants to make her new home move-in ready.
With most government loans, not only must the buyer qualify, but also the home. A dwelling’s eligibility for the 203(k) program includes:
- It must be at least one year old.
- If the home is going to be demolished, the existing foundation must remain.
- If the program is being used to rehab a condo, you must intend to live in it, and all work must be confined to the interior of the unit.
Qualifying for the 203(k) loan is identical to the requirements for any FHA loan. The borrower must:
Show a steady employment history, preferably with the same employer for at least the past two years.
Be a lawful resident of the U.S. and have a Social Security number.
Intend to occupy the home.
Be able to show that your mortgage payment, taxes, insurance and mortgage insurance will be less than 31 percent of gross income.
Be able to show that the mortgage and all other monthly debt add up to no more than 43 percent of gross income.
Be at least two years out of bankruptcy, three years out of foreclosure, and have re-established good credit. There are exceptions to these rules, so speak with an FHA-approved lender for more information.
Have a minimum credit score of 580 to qualify for a 3.5 percent down payment. Borrowers with scores between 500 and 579 may qualify with 10 percent down.
Keep in mind that these are HUD’s requirements and lenders’ requirements may be more stringent. For example, most lenders require a credit score of 620 or higher, although there are rumors in the lending industry that this may increase.
How the 203(k) Loan Works
The beauty of the 203(k) loan program is that the borrower has only one loan that incorporates both the price of the home and the cost to rehabilitate it. The loan amount is based on what the property’s projected worth will be after the work is done.
The nuts and bolts of how the program works are detailed and may be somewhat confusing to homebuyers who lack home construction experience. The process starts with the lender, and you must use one that is FHA-approved. Ask your real estate agent for a referral, or you can find a list of these lenders at HUD’s website.
Your lender will then choose an FHA-approved consultant, whose job it is to determine the scope of work required. Once that determination is made, the appraiser will figure out what the property will be worth when the work is complete. Payouts from escrow will occur at several points during construction.
You will have six months to complete the rehab.
With housing inventory tight in many regions across the country, expanding your home search to include fixers may just allow you to rehab your way to the home of your dreams. So, go ahead and fall in love with the possibilities. You can afford to buy a fixer.