Realize the American dream by purchasing the worst house on the block
By Brian Flock (Examiner.com)
Distressed properties receive a “blight bailout” from Government-backed “renovation loans”
Most first-time home buyers in San Diego have been looking for the perfect starter house. Yet in a market full of distressed properties from short sales to foreclosures, the ideal starter home can be hard to acquire. Frustrated by bidding wars due to artificially low inventory, many would-be buyers have made a dozen or more offers on starter homes just to be frustrated by (lower) cash offers, or by property problems that result in low appraisals, thereby making a traditional loan impossible.
Distressed properties in decent locations are fetching multiple offers and traditional, conforming loans for under-maintained homes are virtually impossible to get in today’s stringent lending environment. The solution for determined home buyers could be to buy a less-than-perfect house in a desirable neighborhood and to renovate it using a FHA 203(k) loan.
Conforming loans often don’t work for distressed properties
Conforming loans (including standard FHA, non-203(k) loans) generally require that all structural, health and safety issues be remedied prior to closing of the sale.
However, short sale properties and foreclosures (aka REO sales) are often neglected and vandalized properties that don’t qualify for a standard loan without substantial repairs by the sellers. Unfortunately, sellers—often banks—with negative equity simply aren’t willing to make the investment and have tended to seek out cash buyers, most of whom are investors who plan to instead buy the home as-s, perform minimal repairs, and rent out the house.
The effect of government moratoriums on foreclosures can’t last forever and we will soon find ourselves back in a period of high inventory. A tendency towards the buyer’s market is heading at us with no substantial relief in delinquencies and joblessness. So what is to become of the expected increase in short sale and foreclosure properties that are already becoming eyesores in their respective neighborhoods?
Solution can be the FHA 203(k) loan
For good-credit buyers with vision and patience, the answer to realizing their American dream may lie in the FHA 203(k) loan which is designed to renovate neglected properties. Never has this 35 year old program been more necessary or appropriate than in the current, San Diego home market crisis.
How the program appraises a San Diego home’s value
Simply put, the FHA 203(k) loan is a loan guarantee to traditional lenders that encourages them to lend money on run down properties subject to the following appraisal criteria:
· First, an appraisal determines the current, as-is home value in its less-than-ideal state.
· Second, FHA guidelines, overseen by a certified HUD consultant, authorize repairs and upgrades to improve the value of the property according to guideline amounts by region.
· Finally, the lender sums up the as-is home value plus the value of the repairs/upgrades and factors in a buffer amount. In other words, the lender can offer somewhat more than the sum of the as-is value of the home plus the authorized cost of the repairs and upgrades.
The program recognizes that many buyers don’t want to live in a loud and dusty construction zone so the loan allows the buyers to finance up to six (6) months of mortgage payments during the repair work. (This feature has offered the additional benefit of saving more than a few relationships!)
The program also addresses multi-unit buildings up to four (4) units or even up to eight (8) units if the number of units will be reduced to the maximum four (4) dwellings with goal to make the property more marketable. Although one of the units must be owner-occupied, there is no requirement that the owner occupy the largest dwelling. As an added bonus, the FHA counts resulting rental income at 90% of rent (instead of the traditional 75% for conforming loans) making the qualification for multi-unit properties manageable.
FHA 203(k) program is also benefit for real estate agents/brokers
Real estate agents brokers should also be more supportive and knowledgeable about this program in the current environment. Brokers that list foreclosures (i.e. REOs) are often relegated to pay for repairs before sale and can wait months for reimbursement from the seller. The FHA 203(k) program defers such maintenance until after the close of escrow which should delight most agents who only get paid at closing.
The hyped “streamlined (k)”
There has been some level of “buzz” lately of the relatively new Streamlined (k) loan and substantially more lenders offer this program that the regular FHA 203(k) loan. However, practical uses of the streamlined program have been hard to find here since the program is limited to total repairs of $35,000 and distressed houses in San Diego often exceed that amount when reviewed prior to closing.
Most generally, the standard FHA 203(k) loan (i.e. not the streamlined one) is the most widely applicable renovation loan. The reality of both loan 203(k) programs is that they take about the same amount of time and the streamline loan may only save a couple hundred dollars in HUD Consultant fees which later need to be spent on a standard FHA 203(k) loan.
Increased loan limits in 2009
One historical barrier for home buyers with FHA loans in San Diego County have been the relatively low loan limits. Up to March 2009, the FHA 203(k) loan limits were $362,790 (single family home); $464,449 (duplex); $561,411 (triplex); and $697,696 (4-plex) with a 3.5% down payment.
However, this years’ stimulus program increased those limits by nearly 100% resulting in maximum loan values of $697,500; $892,950; $1,079,350; and $1,341,350 respectively with only 5% down. Further, buyer down payments and closing fees can count the new $8,000 tax credit (for first time/new buyers) and other seller credits up to 6% of the purchase value.
San Diego home buyers with vision
Buyers with a penchant to look past a rough exterior and see a vision for their future home have a exciting way to purchase short sales, foreclosures, and other homes with deferred maintenance through the FHA 203(k) program.
Not all loan brokers offer loans for the FHA 203(k) so buyers are encouraged to find a lender with years of experience in these loans.