If you intend to purchase a distressed property, it is important to educate yourself on the financing types available that will assist you. If you purchase a foreclosed property from an institution, typically the seller will only pay a limited amount of the buyer’s closing costs. Also, financial institutions or government agencies that sell residential properties usually are reluctant to make repairs and most likely will not allow the buyer to make any alternations or repairs to the property. If the property you are considering will need repairs or improvements or the seller is unwilling to allow the utilities of the house to be turned on for inspection, your alternative would be a renovation loan. Renovation mortgages allow repairs or improvements to be added to the mortgage and completed after the house has transferred from the seller to the buyer. Below is a brief explanation for both conventional and Federal Housing Administration (FHA) loans.
• Conventional Financing – The Fannie Mae Homestyle® renovation mortgage allows repairs or improvements to be added to the mortgage as well as all work to be completed after the house transfers to the borrower’s name. Some of the benefits of this loan types include: one mortgage for purchase and repairs, home assessment based on completed value of house, and all work can be completed after the mortgage transfers into the borrower’s name. Financing is available with as little as 5% down and that all borrowers meet a minimum credit score requirement. All repairs and improvements must be quoted and completed by a licensed contractor.
• FHA 203k – This loan type allows the cost repairs, upgrades, or improvements to be added to the first mortgage. The appraisal is based on the completed value of the home after the repairs and improvements. The FHA 203k loan comes in 2 basic types. The full and streamline versions. The full 203k allows for structural repairs, additions, or properties that have significant repairs exceeding $35,000. The 203k streamline version is usually used for properties that need minor repairs. Both versions require a licensed contractor to provide a written itemized estimate listing all repairs. The FHA 203k loan requires all health, safety, and energy conservation items to be included on the contractors estimate and added to the mortgaged amount.
Prior to accepting a contact, make sure you are aware of any possible delays that may occur due to the seller’s situation. Has the deed been transferred to the seller, are there outstanding liens, title issues, or point of sale requirements from the city the house is located in. Unexpected delays may be costly for a buyer, such as: rate extension fees, updated credit reports, and appraisals.