How to Finance the Fixer?
Some people want to buy a house in perfect shape. Other people see a house in disrepair and can imagine it reborn, remodeled, and tailored to their specific needs and tastes. I confess to being in the latter group, I tend to get very excited about well priced homes that need fixing.
The problem with this (as anyone who has ever done a home inspection or had an appraisal will tell you) is that banks generally only like to loan money on houses that are all in one piece! There is a way to finance your dreams.
The solution is a Rehab Loan, such at the FHA (Federal Housing Administration) 203K loan. This loan is available only to buyers who are buying a house to live in themselves, so flippers (are there any of those left out there?) must go elsewhere.
Here’s how it works. You find your dream house in Hilltop for $125,000. It is the coolest craftsman you’ve ever seen, but it needs some help. You talk to a contractor who tells you it needs:
A New Roof – $10,000
Siding Repairs and Exterior Paint – $3,500
and your wife thinks it needs:
New Kitchen Cabinets – $3,000
New Countertops – $500
New Appliances – $2500
Add that all together and the Contractor tells you it’s going to cost about $20,000 to get the house in ship shape. What the FHA 203k does is allow you to add the $20,000 in repairs to your $125,000 purchase price, making the amount of your loan $145,000. The contractor will make the repairs before you move in. Your down payment requirement depends on the neighborhood and your financial circumstances, but it will most likely be between 5%-10%. In this scenario, that means your down payment would be between $7,250-$14,500.
If you are interested in getting prequalified for an FHA 203k loan, I would recommend finding a lender that specializes. DOn’t be shy, ask your lender how many 203k loans they have closed this year. I first heard about the program from my first lender, Gary Hafsahl at the Downtown Tacoma Wells Fargo. Most banks and mortgage brokerages have someone who specializes in 203k loans, so find out who it is and get started asking them some questions.
