Buying a home that needs rehabilitation is possible and you have several mortgage options that can be used to finance your venture. Many homes on the market are in foreclosure with prices lower than market value, while others sell for lower prices due to their state of disrepair. If you have the patience to pursue the purchase of one of these types of property, you can rehab it to bring it up to its market value. Mortgages for home rehab work similarly to a construction loan and will give you the funds you need to make the home livable.
FHA 203(k) Mortgage
One of only a few loans available for home rehab, the FHA 203 (k) mortgage program allows borrowers to finance the difference between the purchase price and projected appraisal price of a home that is in need of renovations. The funds of the mortgage can be used for repairs and improvements of the property they wish to purchase but cannot be used for luxury additions such as spas, saunas, or swimming pools. There are several other requirements that must be followed by the when using this loan.
Borrowers must show that the money has been used for the renovation of the home and a consultant will be necessary to assess the construction plan for the property. They will then perform an inspection before a draw on the money can be made. A draw is a portion of the money that is being borrowed and is paid to the contractor as work is performed and inspected. You will have six months to complete the renovations of the home and will be allowed draw money five times.
Although the FHA does not set a minimum credit score for a 203(k) mortgage, many lenders require that you have a score of 640 or greater. The down payment for a 203(k) loan is 3.5 percent, making it one of the lowest down payment mortgages in the lending market. The FHA 203(k) mortgage program is strictly for owner-occupied homes and is another of the requirements of this loan.
If your rehab project requires less than $35,000, an FHA 203(k) streamlined mortgage is easier to get, and requires less paperwork. You will not need a consultant for the FHA 203 (k) streamlined mortgage, which will save money. The limit on both the FHA 203 (k) and 203(k) streamlined averages to about $270,00o. The amount could be higher or lower, depending on the location of the real estate and borrowers may loan up to 110 percent of the home's value.
Fannie Mae Homestyle Loan
A Fannie Mae Homestyle loan is another way to borrow the money you need to purchase a home in need of rehab. Lenders who participate in this program require borrowers to have a minimum credit score of 660 or greater and a five percent down payment. If you have a credit score that is higher and can come up with a higher down payment, you may get a lower interest rate for your loan.
Another advantage of a Homestyle Loan is that it can be used to purchase investment real estate and does not limit the use of the money for swimming pools, spas, or other luxury features. This gives the ability to purchase a one to four unit property, in which you live, a one unit second home, or a one-unit investment property. It can be a single-family residence, in a planned urban development (PUD) or it can be a condominium.
Like the FHA 203 (k) mortgage, the loan can be made for the future value of the home, after renovations. This gives you the opportunity to borrow the money to buy the home and renovate it. Renovation costs are limited to 50 percent of the completed appraised value of the home. A Homestyle loan has a fixed rate for a term of 15 and 30 years, giving you options for repayment.
VA Loan
It is possible to obtain a guaranteed loan for minor home rehab through the Veterans Administration, but they are difficult to get. They also limit the upgrades that you can do and usually are only available for upgrades that add energy-efficiency to the home. Although the VA makes allowances for a rehab type loan, it can be difficult finding a lender to make the loan.
Rehabbing your Mortgage
Renovating a home is not for the weak of heart, and may be more than many homeowners want to take on. Whether you perform the work yourself or hire a contractor, close attention to costs will be necessary to keep from going over budget. As with any real estate purchase, due diligence and a plan of action can save many headaches down the road.