I hear this a lot:
“I’d like to buy a foreclosure because I can get a great deal, but almost every one I see looks like crap – dirty carpet, missing or broken appliances, lots of cosmetic repair work – and I don’t have much cash after the down payment, so how am I supposed to fix all this stuff?”
It’s certainly true that in looking for a great deal on a foreclosure, you are going to encounter a lot of homes that have not been cared for very well. As you can imagine, when folks can’t make their mortgage payments, they have little money or incentive to maintain the property as well as they otherwise might. If you do manage to come across a foreclosure in good condition, you can be sure it will sell quickly, and the buyer will pay close to market price. Not the great deal you were looking for, right?
FHA has a loan program that is designed precisely for this situation, and makes it as easy as possible to get qualified and get the repairs done. The loan program is called the FHA 203k Streamline program and it allows homeowners to finance improvements costing up to $35,000 into the original mortgage. (For those homes that need major rehabilitation, there is also a full FHA 203k loan which will allow more than $35,000 worth of rehabilitation work to be done, but is much more complex. This post covers only the “Streamline 203k” – for more info on the “full 203k” see here.)
Because the 203k Streamline is an FHA program, all standard FHA guidelines apply when qualifying for the loan – low down payment, etc.
The maximum Streamline 203k mortgage amount is the lesser of:
- The maximum (statutory) mortgage limit for area (Northern Virginia is $625,500 for 2009).
- The “As is” value (usually the purchase price or outstanding debt in case of a refinance transaction) plus cost of rehabilitation .
- 110% of “After Improved” value; Condominiums are limited to 100% of “After Improved” value.
- If the borrower has owned the property for less than one year, the acquisition cost is the maximum.What improvements are eligible under the new Streamlined (k) program?
The Streamline 203k program is for uncomplicated improvements to a home for which plans, consultants, engineers and/or architects are not required. It includes the improvements shown below:
- Repair/Replacement of roofs, gutters and downspouts
- Repair/Replacement/Upgrade of existing HVAC systems
- Repair/Replacement/Upgrade of plumbing and electrical systems
- Repair/Replacement of flooring
- Minor remodeling, such as kitchens, which does not involve structural repairs
- Painting, both exterior and interior
- Weatherization, including storm windows and doors, insulation, weather stripping, etc.
- Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwave ovens
- Accessibility improvements for persons with disabilities
- Lead-based paint stabilization or abatement of lead-based paint hazards
- Repair/Replace/Add exterior decks, patios, porches
- Basement finishing and remodeling, which does not involve structural repairs
- Basement waterproofing
- Window and door replacements and exterior wall re-siding
- Septic system and/or well repair or replacement
That’s an extensive list of the sorts of things that need doing on most foreclosures. What properties are not eligible? If they require the following sorts of work, you’ll have to use the “full” 203K:
- Major rehabilitation or major remodeling, such as the relocation of a load-bearing wall;
- New construction (including room additions);
- Repair of structural damage;
- Repairs requiring detailed drawings or architectural exhibits;
- Landscaping or similar site amenity improvements;
- Any repair or improvement requiring a work schedule longer than six (6) months; or
- Rehabilitation activities that require more than two (2) payments per specialized contractor.
Under the 203k Streamline guidelines, you must use contractors to complete the work unless you can provide documented proof that you can perform the work yourself (for example, if you are a licensed plumber or electrician) and the lender will verify your contractors’ credentials in the loan process. The contractor will also have to provide licensing, bonding and insurance documents and professional estimates. However, for the 203k Streamline program a general contractor is not required, so you can line up your contractors yourself.
Once the loan is approved and closed, the repair funds are held in escrow until payment is made to the contractors. You will have up to 3 months from your closing date to complete the work and no more than 2 payments (first payment and final payment) may be paid to each contractors. The first payment is limited to a maximum of 50% of the total cost, and all payments are disbursed to the contractor unless you are performing the work. In that case you have to provide receipts for materials and of course your labor is “free.”