Here’s an actual real estate headline from this week: “Condemned California home with holes in roof, mildew, sells for $1.23 million”. That’s a big chunk of change for a condemned home. But in a San Francisco suburb, it does dramatize what is going on in some markets and that “fixers” can have real value. This one is planned to be replaced with a 4,000 square-foot "masterpiece" offering a view of the bay from a second story.
With inventory as tight as it is at many locations, buyers should at least be considering fixers as an alternative to turn key homes that are more and more difficult to find and even harder to afford. For buyers considering going this route, there is the FHA 203k loan (also known as a Rehab Loan or FHA Construction loan). The purpose of this loan is enabling buyers to finance both the purchase and the rehab with the same loan. There’s some security and peace of mind knowing that you qualify for both at the same time and through the same lender.
FHA 203k loans aren’t for everyone and not every lender offers them. There are other purchase and improvement loans available but almost all others come with high interest rates, short repayment terms, and a balloon payment. Section 203(k) offers a solution that helps both borrowers and lenders, insuring a single, long term, fixed or adjustable rate loan that covers both the acquisition and rehabilitation of a property. These loans are available before the condition and value of the property may offer adequate financial security. But these do come with government red tape.
A few of the common requirements are:
The dramatic $1.23 million home isn’t what these loans are primarily intended for. A 203k loan does follow many of the rules and restrictions of FHA basic single-family mortgage insurance products and can be relatively convenient for lower income borrowers. However, lenders may charge some additional fees, such as a supplemental origination fee, fees to cover the preparation of architectural documents and review of the rehabilitation plan, and a higher appraisal fee.
The types of improvements that borrowers may make using Section 203(k) financing include:
Nationally (from January 1 through March 31, 2018), HUD endorsed 6,003 cases for 203k loans.
Please leave a comment if this article was helpful or if you have additional insight.
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 12 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.