The answer is this; you can get a mortgage to buy a house and fix it up at the same time using the same loan. Renovation financing otherwise known as FHA 203K and Fannie Mae HomeStyle loans; provide solutions for this stalled market segment. The renovation financing revolution is in full bloom as home buyers are taking properties in need of attention and turning them into dream homes with help from the FHA and Fannie Mae.
My colleague and long-time mortgage guru; Matt Gratalo says “a lot of first time homebuyers are bargain hunting but thin inventory does not give them much opportunity. Renovation financing lets them buy the ugly duckling house at a discount and turn into the neighborhood swan.”
To understand how renovation financing works, a basic tutorial about the valuation mechanics for these loans will be helpful. A traditional, straightforward purchase or refinance mortgage loan relies on the current market value of a property based on an appraisal. Renovation financing considers the purchase or acquisition price supported by an appraisal, then adds in the proposed improvements (using architectural plans and specs and builder costs estimates), and allows the appraiser to make a determination of what the “after improved value” would be. Essentially determining and relying on what the value of the property will be once the improvements are done. The financing is then based on that after improved value.
For example; if the purchase price of a house is $300,000 with improvements estimated to be $100,000 and the appraiser determines the after improved value to be $400,000, then the down payment and mortgage financing will be based on the $400,000 after improved value. For an FHA 203K loan, the down payment can be as little as 3.5% of that $400,000 AIV, for a Fannie Mae HomeStyle loan, the minimum down payment would be 5%.
Renovation financing can also be used to refinance current mortgage obligations and make improvements to the home you currently own!
Short sales and foreclosures are often “as is” sales, and lenders want any defects fixed before closing. This is not an issue with 203K and HomeStyle financing as correcting the defects are included in the improvements, allowing closings to proceed without having to address any “as is” issues.
These are not exotic loans, they are actually pretty straightforward but they have more moving parts than a traditional mortgage loan. And more people are involved in the process (contractors, architects, and renovation lending staff to name just a few!), so experience and expertise are important, taking the time to vet prospective lenders will pay efficiency and cost dividends throughout the process.
So head on out to Open Houses this Sunday and take your creative vision with you, because that neglected, diamond-in-the-rough-needs-work-so-nobody-wants-it-house, might just be the dream home where you will raise your family

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Home buyers thinking of purchasing a distressed property in need of repair, but who are concerned that the cost of the repairs could drain their savings account may qualify for the Federal Housing Administration’s (FHA) 203(k) rehabilitation program.

The FHA’s 203(k) rehabilitation program provides loans for covering renovation costs as well as the purchase price of the primary residence. Investors are not eligible for this program. Additionally, similar to traditional FHA loan programs, the rehab program allows for a down payment of as little as 3.5 percent.

•A common misperception about the program is that the house needs to be unlivable. Realistically, the property just needs to be outdated, according to a lender familiar with the program. The property “just has to appraise below market value and then at market value with the repairs.”
•Improvements deemed “luxury” are ineligible; however, the program has a wide range of definitions for “repairs” and “modernization.” Covered repairs include items such as a new roof or heating system, as well as decorative changes, like replacing vinyl with ceramic tile on the kitchen floor or painting the interior.
•In addition to putting down at least 3.5 percent of the current value of the property, buyers also must use a HUD-approved lender, appraiser, and a contractor approved by the lender for the repairs. One list of approved businesses can be found at 203kcontractors.com.
•Borrowers considering the FHA rehab loan program should be aware that loan rates typically run around a percentage point higher than conventional loans, and come in 15- to 30-year terms, either fixed or adjustable. Additional paperwork for inspection, appraisal, title updating, and the like can increase closing costs by $1,000 or more higher than the average.
For additional information about the FHA 203(k) rehabilitation program, please visit http://www.hud.gov/offices/hsg/sfh/203k/203kabou.cfm

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