Financing today’s fixer-uppers and selling for profit using FHA 203k loans – it’s possible!
There’s a lot of hype today about buying and fixing up foreclosures. Late night TV infomercial shows are selling the “roadmap” to making millions…are they making millions selling books or selling Real Estate?
The truth is that it is possible to finance distressed homes, and borrow the money to fix them up as well. My guess is that those late night TV infomercials are making their money selling the books rather than the Real Estate, but I don’t really know.
What I do know is that there are legitimate and historic opportunities in the Real Estate Market today to buy homes at a great value. If your credit is good, there are also plenty of traditional financing options as well.
Renovation Loan Programs
The FHA 203k loan is a loan that provides money for the purchase and renovation of a home that will be occupied by its owner. It allows lower credit scores (established “lender by lender”), a low (3.5%) down payment, and is based upon the “after repaired value” of the home.
So – you don’t want to live in the home? You want to buy and fix up a home for rental or to turn around and resell it for profit? No problem! The Fannie Mae Homestyle Standard Renovation loan is your ticket. A minimum of 20% down of the purchase price plus improvements and a higher credit score are some of what you’re going to need to qualify.
Types of 203k loans
There are two distinctly different FHA 203k loan programs: The Full 203k and the Streamline 203k.
Under the streamline 203k, lenders are not required to inspect the work if the bids are under $15,000. You may have spoken with a lender who simply was not willing to do repair amounts under $15,000. You can finance up to $35,000 worth of work under the Streamline FHA 203k program.
There is also a “FULL 203K”. This program allows repair amounts over $35,000.
If you want the most flexibility you want to work with a lender who is really in the business and offers all of the FHA 203k options available. This way, if you need to change from one product to another you don’t have to also change lenders and start your loan process all over again. So if you’re counting on a $15,000 bid and it comes in at $16,000 you might want to make sure your lender can handle the “full menu”!
How much can I borrow with a 203k loan?
There exists some confusion about the limits of the various 203k programs. The Streamline 203k can be used with repair amounts up to $35,000 but the full 203k is only limited to the geographic FHA mortgage loan limit.
The maximum loan amount is calculated using a form called a Maximum Mortgage Worksheet and then is capped based upon the County you live in.
On a purchase, you can borrow essentially 96.5% of the sum of the purchase price plus the cost of improvements to be made. There are also some additional closing costs which can be financed.
When re-financing, the home must first be at least worth 97.75% of the “as is” value (an “as is” appraisal and a “subject to” appraisal will be done in a 203k refinance transaction).
Buying a fixer upper and selling it using a FHA 203k loan is possible – make sure you have a great team in place who can help you avoid many of the common pitfalls in order to maximize your chances of making the most profit possible.Click to See the Latest Mortgage Rates»