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How to Get a Mortgage Loan for a Fixer
Here's a clever real estate dictum for you: Don't buy the best house in a bad neighborhood; buy the worst house in a good neighborhood.
There are several reasons for this rule, but the main one has to do with property values, which are determined in large part by the surrounding homes. If you buy the best home in a bad neighborhood, your home sets the highest price consideration in the area.
If you purchase a lower-priced home in a good neighborhood, you'll pay less for it, and with improvements, you can greatly increase its value. The higher-priced homes surrounding it will also buoy its value.
This doesn't necessarily mean you need to purchase a fixer. Sometimes a small home in a good neighborhood offers a good value if there is room to add to it. A fixer, however, presents you with the best opportunity to quickly build equity.
The FHA 203(k) Loan
If you think it's impossible to get a loan for a house that is uninhabitable, or needs a lot of work, think again. Not only is it possible, there is even a loan that allows you to live somewhere else during the rehab, while not having to worry about two mortgage payments.
The United States Department of Housing and Urban Development is the umbrella agency for the Federal Housing Administration (FHA). You've no doubt heard of FHA loans – which are low down payment loans that are guaranteed by the U.S. government.
The FHA offers another program called the Section 203(k) program, also known as Rehab Mortgage Insurance. Like a standard FHA loan, this program guarantees the repayment of the loan. Where this loan program differs is that it allows the borrower to finance both the purchase and the cost to rehab the house all in one loan.
Two Types of FHA 203(k) Loans
FHA offers the standard 203(k) loan that pays for rehabbing a house. Items such as a new roof, replacing plumbing, adding or replacing floors, and major landscaping are among the type of work allowed.
The program also offers a streamline FHA 203(k) loan, which pays for non-structural elements, such as painting, adding energy-efficient appliances and new carpet. In addition, homeowners can tap into the program to finance repairs required by an inspection report or to perform other work needed to get the property ready to sell.
The maximum loan amount for the streamline program is $35,000.
Ways to Use the Standard 203(k)
While most borrowers utilize the 203(k) to rehab a fixer, there are other ways to use the loan, as well. A homeowner can borrow the money to convert a single-family home into a multiple-unit dwelling, with up to four units. Or, the borrower can do the opposite – convert a multiple-unit home into a single-family home. Finally, the 203(k) loan can be utilized to move a house onto the property on which you've taken out a mortgage.
Of course there are rules and stipulations to all of these alternatives, which interested homeowners should take the time to look into.
FHA has eligibility requirements for the property. These include:
The dwelling must either be a single-family home or a multiple-unit building with a maximum of four units.
The dwelling must be at least one year old.
Condo projects are limited to the interior of the unit. Other rules apply for condos.
The cost of the project must be at least $5,000, but you are prohibited from raising the value of the home to more than the FHA mortgage limit for the area. You can find the limits for your area on FHA's website.
This loan is for owner-occupants only. Investors, home flippers and the like don't qualify for the FHA 203(k) loan.
While FHA doesn't require a minimum credit score to qualify for the loan, lenders do – and the score varies by lender. Wells Fargo, for instance, dropped their minimum score requirement in February, from 640 to 600.
You must be a legal U.S. resident.
You will need from 3.5 to 10 percent of the loan amount as a down payment. This is in addition to closing costs and the cost of mortgage insurance.
The maximum debt-to-income ratio for an FHA backed loan is 43 percent.
Borrower requirements can and do change, so consult with a HUD-approved lender for the latest changes. You can find a list of these lenders on HUD's website.
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