Quite a few temptingly-priced fixer-uppers have popped up near my office recently. (This one’s asking price was $290K. It sold for $500K.) I asked Mark Hannum from HomeStreet Bank how I could get my hands on one of these beauties. Here are my notes:
When you apply for a regular mortgage, the lender would typically want major defects – say, the lack of a roof – to be addressed before accepting a house as your loan collateral. But with rehab financing, such as the HUD 203(k), you can get one single loan to buy AND renovate a fixer.
To get a rehab loan, you first need licensed contractors to provide written bids. Your lender then appraises the property as-as, and estimates its post-repair value. This prevents you from putting more money into a project than the market would justify.
Your loan amount would be based on your purchase price, plus the cost of work to be performed, plus an added contingency for cost overruns. After closing, your contractors are paid from an escrow account. If you don’t use up the entire amount, whatever is left will be applied to the loan principal.
HUD 203(k) loans are only available for owner-occupied homes. Your down payment could be as low as 3.5%. Repair work must start within 30 days of closing and be completed within 6 months. You’d have to let the loan “season” for a year before you can refinance based on the post-repair value. You may now have 20%+ equity, so that you no longer have to pay mortgage insurance.
Fannie Mae’s HomeStyle Renovation loans may be more cost effective for borrowers with good credit scores. They’re available to owner-occupants and investors and allow up to a year to complete renovations. Unlike 203(k)s, which require all work to be done by licensed contractors, you can DIY part of a HomeStyle Renovation project (up to 10% of as-completed value).
Mark also mentioned the possibility of conventional financing with an escrow holdback. This may offer a lower interest rate. Let’s say I’m interested in a roof-less house. The seller or I could ask a contractor for a written estimate, then set aside 150% of this amount in an escrow account, so that my lender could be assured that they would have a newly roofed home as collateral.
I did some subsequent research and learned about PACE (Property Assessed Clean Energy) financing. Too bad it isn’t available in Washington State. If you live in CA, MO or FL, you could borrow 100% of the cost of installing solar panels, energy-efficient HVAC, water-saving landscaping etc with no down payment. The loan would be repaid with an assessment added to your property tax bill. Since PACE loans are attached to properties rather than their owners, if you sell your home, you could transfer any PACE balance to the buyer.