Home buyers thinking of purchasing a distressed property in need of repair, but who are concerned that the cost of the repairs could drain their savings account may qualify for the Federal Housing Administration’s (FHA) 203(k) rehabilitation program.
KEEP THIS IN MIND
• The FHA’s 203(k) rehabilitation program provides loans for covering renovation costs as well as the purchase price of the primary residence. Investors are not eligible for this program. Additionally, similar to traditional FHA loan programs, the rehab program allows for a down payment of as little as 3.5 percent.
• A common misperception about the program is that the house needs to be unlivable. Realistically, the property just needs to be outdated, according to a lender familiar with the program. The property “just has to appraise below market value and then at market value with the repairs.”
• Improvements deemed “luxury” are ineligible; however, the program has a wide range of definitions for “repairs” and “modernization.” Covered repairs include items such as a new roof or heating system, as well as decorative changes, like replacing vinyl with ceramic tile on the kitchen floor or painting the interior.
• In addition to putting down at least 3.5 percent of the current value of the property, buyers also must use a HUD-approved lender, appraiser, and a contractor approved by the lender for the repairs. One list of approved businesses can be found at 203kcontractors.com.
• Borrowers considering the FHA rehab loan program should be aware that loan rates typically run around a percentage point higher than conventional loans, and come in 15- to 30-year terms, either fixed or adjustable. Additional paperwork for inspection, appraisal, title updating, and the like can increase closing costs by $1,000 or more higher than the average.
• For additional information about the FHA 203(k) rehabilitation program, please visit http://www.hud.gov/offices/hsg/sfh/203k/203kabou.cfm.
One of the best ways to select a contractor is to ask friends or relatives for recommendations. Make sure they have worker’s compensation insurance and general liability insurance in case of accidents on the job.
Building codes set minimum safety standards for construction. Generally, a building permit is required whenever structural work is involved. The contractor should obtain all necessary building permits.
- Hire only licensed contractors.
- Contact the Contractors State License Board at www.cslb.com.gov or at 800-321-2752 to verify the contractor’s license.
- Get three references and review past work.
- Get at least three bids.
- Get a written contract and don’t sign anything until you completely understand the terms.
- Pay 10 percent down or $1,000 whichever is less.
- Don’t let payments get ahead of the work.
- Don’t pay cash.
- Don’t make a final payment until you are satisfied with the job.
- Don’t rush into repairs or be pressured into making an immediate decision.
Spring and summer projects are getting underway. Good luck with your home improvements!
Thinking of making improvements that will add to your home’s value but don’t know how to pay for them? Many small projects can be done with little expense, so funding them may not be a problem. If you have the experience and tools to do the work yourself, it can be even more affordable.
When a professional is required, however, you may need to borrow money to pay for the improvements. One financing option is cash-out refinancing.
Interest rates and the amount of your current mortgage balance will determine whether you can refinance with enough cash to cover a remodeling project and still retain affordable monthly payments.
As with any large project, you need to keep your goals in mind. If your main goal is to increase the value of your home with a renovation, you should first determine how much value each project will actually add. That way, you can decide how your money would be best spent to gain the most value.
Brian Ripp, CRS, GRI, Broker - your Bay Area Realtor
www.BrianRipp.com serving Fremont, Newark, Union City & surrounding communities. Real Estate & Property Management.
Home buyers thinking of purchasing a distressed property in need of repair, but who are concerned that the cost of the repairs could drain their savings account may qualify for the Federal Housing Administration’s (FHA) 203(k) rehabilitation program.