All about the challenges of Midlife Finance

Financing a Fixer Upper Home

I’m searching for a new home and it’s been quite interesting. Our area has been a seller’s market for quite a few years now and the price keeps increasing. We looked at a few homes and the nice ones are priced out of range, so I’m considering a fixer upper. The prices of homes that need repairs are much more affordable, but some of them really need extensive repairs. One home we visited had the whole kitchen ripped out and I’m pretty sure our credit union wouldn’t finance that kind of property. Unless you have cash, it can be difficult to close these deals. That’s why the price is much lower than the market average.

FHA 203k Loans

Is there an alternative to the regular mortgage loan? It turns out that there is a way to finance a fixer-upper. That’s where the FHA 203k loan comes in. The FHA 203k loan program is backed by the federal government and given to buyers who want to buy a damaged home and make it habitable again. An FHA lender would lend you the money needed to buy the house plus the cost of repairs.

There are two main types of FHA 203k loans, regular and streamlined. The regular 203k loan is for properties that need structural repairs such as fixing the kitchen or a new roof from Feller Roofing. The streamlined 203k loan is for homes that need non-structural repairs such as exterior painting or new carpets.

The FHA 203k loan can cover these repairs:

  • Disability access
  • Heating and cooling
  • Plumbing
  • Roof and flooring
  • Kitchen remodeling
  • Appliances
  • Decks and patios
  • Bathroom remodeling
  • Room or second-story additions
  • Siding
  • Finish attic or basement

The program will not cover luxury improvements such as a pool.

How much can you get?

The maximum amount you can get under an FHA 203k loan depends on the type of loan. With a regular FHA 203k loan, you can get the lesser of these two amounts:

  1. The as-is value of the property plus repair costs.
  2. 110 percent of the estimated value of the property once the repairs are done.

If you get the streamlined 203k loan, you can get the purchase price plus up to $35,000.

Benefit of the 203k loan

If you are willing to take on a fixer-upper, but don’t have cash to buy the property outright, then a 203k loan might be the answer. The down payment for a 203k loan is also less than the typical minimal down payment. Of course, there are downsides as well. Not all properties qualify for a 203k loan. It can be difficult to get the loan and the whole process usually takes 60 to 90 days. You can also expect to spend a lot of time on documentation and dealing with bureaucracy.

This might be worth it if you found the perfect house with great bones. A torn out kitchen, demolished drywalls, and bare floors will turn away most buyers and lenders so it could be the perfect opportunity for someone who’s willing to put in the sweat equity. We drew the line at sagging floors, though. Those will require a major foundation repair and I’m pretty sure it will be very expensive.

Photo credit: Flickr NapaneeGal

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