Perhaps one of the greatest opportunities to create wealth or generate a high rate of return on an investment exists in buying real estate that can be fixed up or improved.  The changes sometimes can be as simple as a coat of paint, new carpet, or even just floor and window coverings.  During my marriage, we bought fixer uppers in different conditions of repair.  We lived in the house and then resold each house at a future date. We did that for over 20+ years.  Buying a fixer upper, however, is not for the faint at heart as it takes hard work.

However, with all the foreclosures that have been abandoned or destroyed, there are too many houses that need rehabing.  If you’re wanting to become a rehabber, remodeler, etc. in today’s market, there is a financing tool that can assist you.  Actually, it has been around for a very long time and in the 70s, 80s and even into the 90s, I sold houses using that financing.

It’s the FHA 203K. 

When you purchase a home that needs repairs, often the bank won’t lend the money to buy the house until the repairs are complete, and the repairs can’t be done until the house has been purchased.  HUD lets you purchase or refinance a property plus include into the loan the cost of making the repairs and improvements.  The FHA insurance 203K loan is provided through approved mortgage lenders nationwide and is available to persons wanting to occupy the home. The program can be used for one-to-four unit dwellings. Maximum mortgage limitations are the same as for properties under Section 203(b).

The “Steamline (K)” Limited Repair Program permits homebuyers to finance an additional $35,000 into their mortgage to improve or upgrade their home before move-in.  Homebuyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser.

The FHA-backed 203K rehab loan is becoming increasingly popular in today’s market because there are too many properties that need repair.  A stream-lined 203K provides money to pay for improvements such as a new roof, appliances, furnace, energy-efficient windows and cosmetic improvements such as carpeting, paint and even remodeled kitchens and baths.

“When a homebuyer wants to purchase a house in need of repair or modernization, the homebuyer usually has to obtain financing first to purchase the dwelling; additional financing to do the rehabilitation construction; and a permanent mortgage when the work is completed to pay off the interim loans with a permanent mortgage. Often the interim financing (the acquisition and construction loans) involves relatively high interest rates and short amortization periods. The Section 203(k) program was designed to address this situation. The borrower can get just one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work. To minimize the risk to the mortgage lender, the mortgage loan (the maximum allowable amount) is eligible for endorsement by HUD as soon as the mortgage proceeds are disbursed and a rehabilitation escrow account is established. At this point the lender has a fully-insured mortgage loan.”

A licensed contractor must complete the work within 6 months.  Some lenders will allow the borrower to do minor cosmetic work such as painting themselves.

Eligible Improvements

  • structural alterations and reconstruction
  • modernization and improvements to the home’s function 
  • elimination of health and safety hazards 
  • changes that improve appearance and eliminate obsolescence
  • reconditioning or replacing plumbing; installing a well and/or septic system 
  • adding or replacing roofing, gutters, and downspouts
  • adding or replacing floors and/or floor treatments 
  • major landscape work and site improvements
  • enhancing accessibility for a disabled person 
  • making energy conservation improvements

Seeing a property and its potential for improvement presents an opportunity to create appreciation and increase its value.

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