The purchase of a house that needs repair is often a catch-22 situation, because the bank won’t lend the money to buy the house until the repairs are complete, and the repairs can’t be done until the house has been purchased.
HUD’s 203(k) program can help you overcome this obstacle by enabling you to purchase or refinance a property plus the cost of making the repairs and improvements in one mortgage. The FHA-insured 203(k) loan is provided through approved lenders nationwide and is available to persons wanting to occupy the home.
The downpayment requirement for an owner-occupant (or a nonprofit organization or government agency) is approximately 3.5% of the acquisition and repair costs of the property.
The 203(k) loan includes the following steps:
- A potential homebuyer locates a fixer-upper and executes a sales contract after doing a feasibility analysis of the property with his/her real estate professional. The contract should state that the buyer is seeking a 203(k) loan and that the contract is contingent on loan approval based on additional required repairs by the FHA or the lender.
- The homebuyer then selects an FHA-approved 203(k) lender and arranges for a detailed proposal showing the scope of work to be done, including a detailed cost estimate on each repair or improvement of the project.
- The appraisal is performed to determine the value of the property after renovation.
- If the borrower passes the lender’s credit-worthiness test, the loan closes for an amount that will cover the purchase or refinance cost of the property, the remodeling costs and the allowable closing costs. The amount of the loan will also include a contingency reserve of 10% to 20% of the total remodeling costs and is used to cover any extra work not included in the original proposal.
- At closing, the seller of the property is paid off and the remaining funds are put in an escrow account to pay for the repairs and improvements during the rehabilitation period (6 months).
- The mortgage payments and remodeling begin after the loan closes. The borrower can decide to have up to six mortgage payments (PITI) put into the cost of rehabilitation if the property is not going to be occupied during construction, but it cannot exceed the length of time it is estimated to complete the rehab.
- Escrowed funds are released to the contractor during construction through a series of draw requests for completed work. To ensure completion of the job, 10% of each draw is held back; this money is paid after the lender determines their will be no liens on the property.
- VIOLA! Work is done, buyer/homeowner is happy and taking the after pictures to show family and friends!
WHAT IS A EEM LOAN? (ENERGY EFFICIENT MORTGAGE)
The EEM loan allows a homeowner or homebuyer to finance the cost of the energy-efficient improvements determined to be “cost effective,” which means that the total cost of the improvements, including any maintenance costs, is less than the total present value of the energy saved over the useful life of the energy improvement. The maximum cost of improvements that you can add to the mortgage is 5% of the property’s value with a minimum of 4,000 and not to exceed $8,000.
Examples of Improvements:
Replacing a furnace/cooling system
Fixing or replacing a chimney
Insulating an attic, crawl space, and/or pipes and air ducts
Replacing doors or windows
Installing active and passive solar technologies
New energy efficient appliances
A Home Energy Rating System (HERS) provider or energy consultant will complete a measurement of your home’s energy efficiency and provide a report listing recommended cost efficient energy improvements. You may finance the costs of the energy inspection report as part of the mortgage if the entire package, including these fees, is determined to be cost effective.
Federal Tax Credits for Energy Efficiency
Tax credits are available at 30% of the cost, up to $1,500, in 2009 & 2010 (for existing homes only) for:
Tax credits are available at 30% of the cost, with no upper limit through 2016 (for existing homes & new construction) for: