Buying A Fixer-Upper Using HUD's 203(k) Program

This may be a way to get a bargain on a house but you need some facts before you take it on. You can find a property and the seller accepted my very low bid. The house will need a lot of work, but you feel that you're more than capable of fixing it up, so you buy it. Before long, you're in over your head and you're living in a home and repairing it sometimes years down the road, on top of which you probably won't even get your money back if you sell it.

Often a bank will not grant a mortgage on a house that is in bad shape until the repairs are complete and the repairs can't be done until you buy the house. Talk about Catch 22!

One way to go is to look into HUD's 203(k) program, which makes it possible to purchase a property and include in the loan the cost of the repairs and improvements. It is an insured-loan program that is available through approved lenders all across the country but is only available to people who will occupy the house. The down-payment requirement is 3.5% of the total cost, acquisition and repairs.

Here's some information about getting 203(k) loan:

1. Locate a fixer-upper and do a feasibility analysis with your real estate agent. Then enter into a sales contract that will stipulate that you are seeking a 203(k) loan and that the contract is only in effect contingent upon approval of the 203(k).


2. Find a lender who is approved by the FHA to grant these loans. You will need a proposal spelling out in detail the estimated cost of each repair or improvement.


3. Get an appraisal to determine the value of the property after renovation.


4. If you pass the lender's credit-worthiness test, you will have your loan. The amount of the final loan will include a contingency reserve of 10%-20% of the remodeling costs to cover any extra work that needs to be done.


5. You close on the property, the seller is paid, and the money for repairs goes into an escrow account.


6. Mortgage payments begin once the loan is closed.


7. Money for the contractor will be obtained through a series of draw requests; 10% percent will be held back by the lender to assure that the work will be finished and there will be no liens on the property.

For more information, go to:

http://www.hud.gov/offices/hsg/sfh/203k/203kabou.cfm