Tired of looking at homes that need a bunch of repairs that you do not want to pay for? Tired of looking at newer construction with high HOA and high mello roos or homes that have been done nicely but not to your taste? This program allows home buyers to obtain permanent financing when purchasing a home that will cover certain rehab costs. This could be a huge benefit to many buyers out there that have been looking at beat up bank owned homes or homes with $10,000s of thousands of upgrades done to someone else's taste. Or buyers that are not buying because of lack of funding for necessary improvements and repairs without dipping into important reserves. This could be a great option for buyers considering puting 10% down but hate the thought of PMI!
This loan can be used to fund up to $35,000 in improvements and can be done as part of an FHA loan. Therefor, it limits out of pocket expenses to a 3.5% down payment as an FHA loan. This could be an important tool to allow buyers to purchase a fixer (hopefully priced under market), and gain sweat equity. Here is my recommendation on how to best utilize this program.
Example
Buy a fixer worth $500,000+ after repairs for $400,000 or less preferably ($396,000) so that with 3.5% down + $35,000 for rehab, your loan balance stays under $417,000 and request the seller pay 5% towards closing costs.
Take a loan for $415,915
Put $15,085 down
Put another $5000 towards repair out of your pocket
You are now in the property for $440,000
New appriased value= $500,000
Cash on cash return= 290%+ that's tough to beat!
Moreover you now have $74,085 equity nearly 15% (nearly $60,000 in sweat equity)
If you were previously planning on puting 10% down, if you put the other 5% down you will have put a total of 8.5% down and about 9.5% invested (including extra $5000 pitched in for rehab) and have 20% equity and no mortgage insurance (speak with your lender)!
for more information visit:
HUD information on 203K
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3 comments:
Shevy,
This is a great idea to get some of these REO's off the market that the average person would not make an offer on because of what you just mentioned about spending approx. $35,000 on costs to get the home up to live in condition. The whole reason buyers utilize FHA loans is to be able to put down only 3.5% as they do not have the funds avialable.
The only thing I will mention in addition to what you have posted is that on FHA loans there is a 1.75% up front MIP insurance cost that is normally built into the loan amount. On a $400,000 loan for example the up front MIP costs would be $7,000 that would be built into the loan amount on top of the 96.5% and the rehab costs.
Also on FHA loans the buyer is required to have impounds for taxes and insurance which up front on a home of this value would be about $2,500 - $3,000. When you add in the title and escrow charges and 1% point on top of underwriting and processing fees etc. we normally recommend that the buyer ask for 3% seller concessions to be certain all costs will be covered. FHA allows up to 6% seller concessions.
I think this is an excellent option for many people who can see beyond the superficial problems with some homes and actually have a home as you mentioned upgraded to their own personal needs. The other key item you avoid on many of these homes is multiple offers because most buyers will not buy a fixer upper, rather they want a trun key home
Jeff
Primary Partners Financial
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