Many buyers look for fixer uppers to save money but instead of a home that may need new appliances, fixtures or a paint job a Rehabilitation Purchase Loan is for home that need a major amount of work before they are habitable.
Finding a lender to loan you money on a rehab project can be difficult. Lenders at the time of writing this are faced with a large number of homes on their books that have gone through or will potentially face foreclosure and lending money for a home that has no potential buyer is difficult to justify. However even when homes sales are up and the market is lacking available homes the rehabilitation loan is still a very difficult process.
The first thing you should understand is that a lender will do an appraisal of the home and often the value they come up with will be far less then the actual ASIS value they place on it. This is because the lender can not simply hand the home off to a realtor or auction it without improvements being made or without risking a large chunk of money when the auction brings in a low selling price.
In addition the lender will not lend money based on the completed project. The ASIS value they return will be the amount they will lend you. This means you may have a 25% or higher portion of the buying price that you need to come up with to complete the original purchase. You will then need to fund the cost of improvements.
During rehab of the home you will be faced with other problems such as any unpaid taxes the previous owner left on the home if not covered by the sheriffs sale and you will also need to find an insurance company that will give you construction insurance.
Construction Insurance and Loans can be difficult to get because lenders like to work with businesses that have an established record. You may need to prove that you are working with qualified contractors and architects even to be considered.
HUD Rehabilitation Loans are an option for some homes that are zoned within “government approved areas”. This means if your home is not in one of these areas but happened to be victim to a fire or natural disaster or even termite damage that requires rehabilitation before an occupancy permit can be approved you may be out of luck.
How Does The Rehabilitation Loan Process Work?
Under HUD’s Section 203(k) it is possible for you to obtain a long term loan to cover the initial purchase and rehabilitation of your potential home. This eliminates the need to get high rate short term loans to cover the rehab project. The rate on the loan can be fixed or adjustable but it is most likely in your best interest to select a fixed rate if available.
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. The loan will be backed by HUD and the portion of the loan not used for the purchase will be placed in an escrow account.
The mortgage must be the first lien on the title.
The maximum amount of the loan can not exceed 100% of its after restoration value.
After you select and make purchase of the home a number of inspections will occur during the rehabilitation process.
If the project is more then $10,000 then the escrow account will allow the home buyer to make pulls from the loan as large sections of the restoration process are completed.
What Homes are Eligible?
Homes with one to four units can apply for this loan.
You may use the loan to convert a single residence into a multi-unit dwelling.
The number of units must comply with local zoning laws and coop ownership is not allowed.
The home may be Mixed Use as long as no more then 25% of the property for a single story or up to 49% of the property for a two story are used for commercial purposes. If you exceed this proportion then only the amount of space used for residential reasons can be included in the loan.
The building must be an Owner / Occupant building with the exception of Nonprofits.
The home can not be completely demolished. At least a portion of the foundation must remain to qualify but the structure of the building can be modified or removed. You will need to submit plans that are approved.
In large projects multiple buildings attached and detached can be combined into one loan.
The home buyer must submit architectural plans showing the full process of the project.
When completed the project must comply with a number of HUD requirements including Smoke Detectors, insulation and weather stripping.