Ocean City Today

Loans available for buyers in need of rehab assistance

Real Estate Report
By Lauren Bunting | Sep 28, 2017

(Sept. 29, 2017) With home prices on the rise, some buyers are struggling to find a move-in ready home within their price limit. But, for buyers who have vision and patience, FHA offers a “rehab loan.” It’s called the FHA 203(k) loan program.

Homebuyers can tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or an FHA appraiser. These improvements can make the home more move-in ready by remodeling the kitchen, painting the interior or purchasing new carpet.

The more popular and easier rehab loan is the FHA Limited (also called Streamline) 203(k) program. This product allows buyers to finance up to $35,000 into their mortgage to repair, improve, or upgrade their home.

The important aspect of this loan product is that it enables buyers to finance both the purchase and the cost of rehabbing through a single mortgage. These loans also protect the lender by allowing them to have the loan insured even before the condition and value of the property may offer adequate security.

To utilize this loan, the home must be at least a year old. A portion of the loan proceeds are used to pay the seller, and the remaining funds are placed in an escrow account and released as rehabilitation is completed.

The cost of the rehabilitation must be at least $5,000, but the total value of the property must still fall within the FHA mortgage limits. The value of the property is determined by either (1) the value of the property before rehabilitation plus the cost of rehabilitation, or (2) 110 percent of the appraised value of the property after rehabilitation, whichever is less.

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:

• structural alterations and reconstruction

• modernization and improvements to the home’s function

• elimination of health and safety hazards

• changes that improve appearance and eliminate obsolescence

• reconditioning or replacing plumbing; installing a well and/or septic system

• adding or replacing roofing, gutters, and downspouts

• adding or replacing floors and/or floor treatments

• major landscape work and site improvements

• enhancing accessibility for a disabled person

• making energy conservation improvements

— Lauren Bunting is a licensed Associate Broker with Bunting Realty, Inc. in Berlin.

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