Buying a "Fixer Upper"

Buying a "fixer upper"? FHA allows you to buy a house and fix it up all with the same loan. The same loan also works if you have a home to want to remodel or repair by refinancing what you owe and the cost of the repairs.

What is this amazing loan you ask? It's called the 203(k) program from HUD. Here are the following steps you need to follow to be on your way to a better home:

  1. First, you find a "fixer-upper" and develop a sales contract. This should be done only after doing a feasibility analysis of the property with a certified real estate professional. The contract should state that the buyer is seeking a 203(k) loan and that the contract is contingent on loan approval based on additional required repairs by the FHA or the lender.
  2. Then you select an FHA-approved 203(k) lender and arranges for a detailed proposal showing the scope of work to be done, including a detailed cost estimate on each repair or improvement of the project.
  3. The appraisal is performed to determine the value of the property after renovation.
  4. If you pass the lender's credit-worthiness test, then the loan will close for an amount that will cover the purchase or refinance cost of the property, the remodeling costs and the allowable closing costs. The amount of the loan will also include a contingency reserve of 10% to 20% of the total remodeling costs and is used to cover any extra work not included in the original proposal.
  5. At closing, the seller of the property is paid off and the remaining funds are put in an escrow account to pay for the repairs and improvements during the rehabilitation period.
  6. The mortgage payments and remodeling begin after the loan closes. Then you can decide to have up to six mortgage payments (PITI) put into the cost of rehabilitation if the property is not going to be occupied during construction, but it cannot exceed the length of time it is estimated to complete the rehab.
  7. Escrowed funds are released to the contractor during construction through a series of draw requests for completed work. To ensure completion of the job, 10% of each draw is held back; this money is paid after the lender determines there will be no liens on the property.

Return back to the FHA Mortgage home or the FHA Lending Guide.