Using FHA to Pay for your Investment Rehab

Short sales and foreclosures are the two most prevalent vehicles for investors looking to purchase distressed properties at a discount.  However they are not easy on either the nerves or the wallet.  Almost all of them require some amount of rehabilitation and remodeling, along with bringing current any deferred maintenance the property may have suffered while it was sitting empty.

These repairs and maintenance can be very expensive and may prevent some investors from purchasing these types of properties since they don't have the additional cash needed after the closing to make the repairs.

Anyone familiar with that scenario may be interested to know of a little known program sponsored by FHA called a 203(k) loan that can eliminate many of the problems listed above for your short-sale or foreclosure investment.  What the 203(k) loan does, is it combines the purchase price of the property along with all of the estimated repairs and maintenance into one mortgage.

So instead of having to put money down on the purchase and then either use your own cash or find additional financing to make the needed repairs to the property, you can do everything in one loan with one set of closing costs and at a significantly lower interest rate.  The 203(k) loan program let's you borrow more than the house is currently worth.  It bases its valuation on the 'after repaired value' of the house and that is the what it will use to determine your LTV (loan to value) ratio.

Brian Robison, a principal with Summit Design Build LLC, an Atlanta contractor and renovation specialist company, who works the 203(k) loan market in his area said:

 "A lot of people don't know about this loan; it's really a tight-lipped kind of thing," he said. "A lot of Realtors when I call them about (the) 203(k) loan, they say, 'What is that?' Everyone is selling foreclosures, but they don't know what the 203(k) loan is."

That's unfortunate, because it is a great selling point.

Just a few notes from the FHA 203(k) loan website:

• This is the Department of Housing and Urban Development's primary program for the rehabilitation and repair of single-family properties.
• The program operates through FHA-approved lending institutions, which submit applications to have the property appraised and have the buyer's credit approved.
• To purchase a dwelling and the land on which the dwelling is located and rehabilitate it, and to refinance existing indebtedness and rehabilitate such a dwelling, the mortgage must be a first lien on the property.

The best feature of this loan is that it can be rolled into the mortgage.

Robison explains:

"The reason people should use this loan is because it is a way to not have to come upfront with cash. You bring the home's value up and roll it into your mortgage. It really opens up what's available on the market because if someone is looking at homes and saying, 'I can't buy this one because it is going to take $30,000 to redo the kitchen and put in a new carpet, they can get the expense wrapped up into one loan with one closing."

There is even a streamlined version of this loan that can go up to $35,000. Otherwise, the FHA loan limits vary by market, which, according to one website, range from $271,050 to $729,750.

The same website offers this note about qualifying: minimum down payment of 3.5 percent; credit score of 640 or higher; no other FHA loans; and you do not have to be a first-time buyer.