203K Rehab Loan from the FHA

I would like to buy a bank owned house that needs some work. I want to buy the house for $100,000 but take out my mortgage for $118,000 and get back at closing $18,000 so i can make the repairs that is needed. Is this possible and how can I make this deal work.

1 Answer

Even though many mortgage products which existed a year or so ago are now gone the way of the dodo bird, the product which would help you accomplish your objective still exists and is doing very well. Basically, what you are looking for is an acquisition/rehabilitation loan. Given the amount of money you are looking to spend on repairs, probably the best program around right now is a loan insured by the Federal Housing Administration called the Streamline 203(k).

With the Streamline K you can finance 97% of the total of the purchase price plus the cost of repairs – 96.5% after October 1, 2008. The loan cannot exceed 110% of the projected value of the house after the work gets done. In your case, since the total is $118,000, an appraiser will have to agree that the house will be worth at least $107,272 after the work is done.

FHA guidelines do permit “self-help,” i.e., they say that it is OK for you to act as your own contractor. If you are planning on doing the work yourself, you have to demonstrate that you are qualified to do so, i.e. that you have contracting and construction experience -- "I did some drywall and painting work in college" won't do. Furthermore, if you act as your own contractor, you can only seek reimbursement for materials. However, not all lenders who offer the Streamline 203K allow this. You will have to check with the lender who offers this loan to see if they will let you act as your own contractor.

The Streamline 203(k) allows for up to $35,000 worth of repairs for the following types of work:

  • Repair/Replacement of roofs, gutters and downspouts

  • Repair/Replacement/upgrade of existing HVAC systems

  • Repair/Replacement/upgrade of plumbing and electrical systems

  • Repair/Replacement of flooring

  • Minor remodeling, such as kitchens, which does not involve structural repairs

  • Painting, both exterior and interior

  • Weatherization, including storm windows and doors, insulation, weather stripping, etc.

  • Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwave ovens

  • Accessibility improvements for persons with disabilities

  • Lead-based paint stabilization or abatement of lead-based paint hazards

  • Repair/replace/add exterior decks, patios, porches

  • Basement finishing and remodeling, which does not involve structural repairs

  • Basement waterproofing

  • Window and door replacements and exterior wall re-siding

  • Septic system and/or well repair or replacement.

More complex types of work or work requiring architectural plans and drawings, however, are not eligible; if required, such repairs must be done through the more complex "traditional" 203(k) program.

Hopefully the foregoing will help you along your path to buying and fixing up that home. With so many foreclosures on the market, I bet you will see a lot of people taking the same path as you.

So, find yourself a lender that offers FHA loans and ask about the Streamline K. I think you'll be glad you did.