Buying at foreclosure comes with a shroud of fears. The stigma, the sorrow for another family, the confusion in the buying process, the fear of finding too many problems after moving in. All legitimate fears.
For most home purchases, the buyer’s lender wants a clean bill of health for the house prior to closing the loan. Similarly, no buyer wants to risk funds to fix up a house prior to closing, only to have the final loan fall through. Additionally, the seller could balk at selling, or other issues could thwart the closing. Moreover, it is very likely the foreclosed home has defects.
Thus, the one key dilemma in buying a foreclosed home: how do you buy the property and have funds set aside to fix the house after closing? The solution is the 203(k) Loan.
However, if you’re in the “flip-it” business or are a get rich quick schemer, stop reading. If you’re searching for bargain primary residences, which need some renovations or upgrades, or advising clients on the process, pay attention.
The name “203(k”) comes from Section 203(k) of the National Housing Act. The provisions of Section 203(k) are located in Chapter II of Title 24 of the Code of Federal Regulations under Section 203.50 and Sections 203.440 through 203.494.
The 203(k) Loan, at the risk of over-simplifying, is a loan that buys the house (as long as it will be your principal residence) and provides escrowed construction dollars for renovation and appliances post closing. Where most loan programs will only loan funds to buy a ‘move-in-condition’ home, the 203(k) Loan allows a buyer to close on the property before construction begins, and makes funds available for the renovation after the closing.
Since the 203(k) Loan is administered like a construction loan, your garden variety mortgage broker doesn’t want to deal with it, which is why you don’t hear about them. However, more and more lenders are offering 203(k) Loans these days…but you have to ask!
The 203(k) Loan is the perfect remedy for foreclosed homes subjected to Northeast Ohio winters, as the homes were probably not properly winterized when abandoned, so pipes, roofs, basements, appliances, may all need repair or replacement.
Finding a foreclosed home is easy enough. Understanding what’s wrong with the home is not. So, you need to find an honest contractor to conduct a thorough inspection and competent repairs (in addition to the inspector and appraiser the lender will require). The biggest fears most people have in buying a foreclosed home is whether the home can truly be fixed and whether all defects have been discovered. There is no seller who has actually lived in the home available to disclose the true condition and history. Trust me, there are enough foreclosed homes out there and with a little patience, the right experts and an American entrepreneurial spirit you can find the right situation.
First, find a bank which can handle a 203(k) Loan and get qualified. Second, get the foreclosed home lists (you can ask banks for their work out lists, real estate brokers, or visit your local county Sheriff’s Sale website). Third, contact your local Home Builder’s Association for referral to an experienced contractor. Then, start walking properties. Your contractor will help you establish a fair budget (don’t forget a contingency fund) for the work, so when you return to the bank for the loan, you know what amount to borrow.
Buying and renovating a foreclosed home takes diligence, hard work and patience. The 203(k) Loan is a great solution to help families find good homes, put Ohioans back to work, use Ohio materials and get the economy moving again.
For more on the ins and outs of the 203(k) Loan program, visit the U.S. Department of Housing and Urban Development’s website at: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k.