Buy a Fixer-Upper with FHA

Buy a Fixer-Upper with an FHA loan
Buying a home in today's market is a great idea especially if you are able to build equity by purchasing at below market value or by increasing the property's value through some remodeling. There are plenty of properties that may be purchased through foreclosure or short sales. By buying a property such as this you may be buying for less than what the property is worth. What we generally find is these properties are in need of cosmetic freshening up. If you are looking at using an FHA mortgage because you have limited funds for down payment, then remodeling a property may not be something you can afford unless you take advantage of the FHA rehabilitation loan.Known as the 203(k), FHA offers people that are buying homes as their principle residence the ability to include rehabilitation funds within the first mortgage. There are two 203(k) type loans - the full 203(k) and the new streamlined version referred to as the "baby k".Both require the same down payment (3.5% as of January 1, 2009) based upon the sales price plus the rehabilitation costs. The difference between the two programs is the amount of paperwork required to underwrite each loan.The full 203(k) requires an FHA approved consultant prepare a cost estimate based on the area's averages for the work be requested by the home buyer. This report, once signed off by the buyer, is forwarded to the FHA approved appraiser which prepares a residential appraisal of the property including the work involved in the cost analysis.The "baby k" allows for streamlined documentation of repairs. This loan only requires a single bid for the repairs to be made to the property. This bid (made by a licensed contractor) is forwarded for use in the appraisal. Both as-is and as-completed values are determined in the appraisal.The "baby k" only allows for up to $35,000 in repairs to the property while it's big brother does not set a limit on repairs. The streamlined version also only allows for cosmetic work, appliances and energy efficient upgrades. Any structural, landscaping, additions or other items not allowed under the "baby k" can be allowed under the full version.Many lenders do not originate these type of FHA mortgages. Make sure that you deal with someone that has experience preparing these mortgages for underwriting.If you would like more information regarding the 203(k) options you can view the HUD website.