By Harold Copher, Jr., Willow Bend Mortgage
How many of you have watched a “fixer upper” television show and wondered how the financing for those projects came together? The popularity of these type of home renovation shows, along with lower than ideal existing home inventories has motivated buyers to expand their search criteria to include fixer uppers. The good news is there are long term mortgage financing options available to meet that need—from changing out some shag carpet to adding a pool with outdoor kitchen.
The buyer wants the property but only with their repairs or improvements. Put yourself in the seller’s shoes. What happens if you accommodate that request and your buyer can’t follow through with the purchase?
For the most part, there are two different programs designed to facilitate the buyers’ required repairs or requested upgrades after the close of the sale. The choice as to which program is best suited for the transaction at hand, is (as always) a function of the parties’ individual situation and needs. Those two basic options include FHA or HUD sponsored offerings, and the conventional Fannie Mae (FNMA) HomeStyle program.
Common denominators of these loans include having a contractor prepare an estimate with contract to perform the scope of work and a contingency reserve for unforeseen costs. Appraisal reports will include the contractor’s scope of work for an “as completed” valuation of the property as if the repairs/remodel work had already been completed. Both the FHA and FNMA loan would fund at the purchase closing, with funds for the remodel held in escrow and work commencing after closing.
For more extensive work, a draw schedule with inspections can be included. Repairs or remodel work must be performed by a licensed contractor; when licenses are required. Only one contract for the scope of work is preferred, but not required. You can’t change the scope or incorporated materials after closing and work must be completed within six months.
Now, let’s discuss the all-important differences. The 203(k) limited loan is ideal for septic repairs, termite treatment, flooring, HVAC replacement, insulation, window replacement, kitchen upgrades, painting, and/or electrical and plumbing reconditioning. As you can see, nothing structural or that would exceed a maximum $35,000 cap.
The 203(k) standard loan has no maximum remodel/renovation cap, although the total loan cannot exceed maximum county FHA loan limits. Structural or cosmetic repairs are allowed, which means all the repairs approved for the limited loan would be approved for inclusion in the standard loan scope of work. This loan is ideal for more extensive work such as structural repairs, roof replacement, septic installation and pool repairs.
The 203(k) standard loan requires an FHA 203(k) consultant. As you might expect, the more difficult or costly the work becomes, the greater the need for additional levels of scrutiny and review.
Both FHA 203(k) programs require a lower down payment and have more lenient credit score requirements than the conventional FNMA loan. FHA restricts financing to “Owner Occupied” properties only, but includes two to four unit properties, as well as single family residences.
No “luxury” items can be included for either FHA program. New swimming pools, spas, sun rooms, outdoor kitchens and living areas are generally considered luxury items.
On the other hand, the FNMA HomeStyle is a conventional mortgage that provides a convenient way to make renovations, repairs or improvements up to 50 percent of the as-completed value of the property. Funds can be used for any repairs or renovations that are permanently affixed and add value. While no complete teardowns are allowed, there are no restrictions as to whether the work is cosmetic, mechanical, structural or luxury in nature. This is an excellent way to add a pool and/or outdoor kitchen and finance that over the life of the mortgage.
You should expect oversight and paperwork to increase as the value or degree of difficulty in completing the work increases. In addition to owner occupied properties, second home and investment properties are eligible. All properties are restricted to single unit designations, except owner occupied, where two to four unit properties are allowed.
The “fixer upper” can provide an opportunity to make a boring home into something special, or convert a problem home into a real star. The right loan can help transform those dreams into realities…and instead of walking away, the buyers move in. RL