How to Close a Loan on an Uninhabitable House?

You can buy a home that needs repairs.

If you're in the market for a good deal, a fixer-upper might be right for you. These properties can be purchased with cash, a hard money loan, or a rehabilitation loan from the Federal Housing Administration or Fannie Mae. The borrower must meet the qualifying criteria for the rehab loans, but hard money lenders typically don't care about a borrower's credit score. Talk to a few loan originators and see what programs are available to you.

Instructions

1. Apply for an FHA rehabilitation loan. The Federal Housing Administration administers an FHA loan known as a Section 203(k). Prospective borrowers must meet the standard FHA underwriting criteria -- credit score, debt-to-income ratio, assets -- but the appraiser values the home as if it was repaired. The difference between purchase price -- or appraiser-determined as-is value -- and appraisal value is available to the borrower to use for repairs. The property must be owner-occupied and between 1 to 4 units. The funds that are allocated for the repairs must be escrowed with the lender and the lender is responsible for overseeing and approving the work. The money is available in incremental draws.

2. Seek a HomePath mortgage. Fannie Mae is a major purchaser of loans in the secondary mortgage market and they have a program called a "HomePath Renovation Mortgage" that's available to buyers of Fannie Mae foreclosures. A select group of lenders offer the program that allows investors as well as owner-occupants to obtain a 3 percent down payment loan at a low interest rate for a home that needs light to moderate repairs -- up to a maximum of $35,000. The exact rehabilitation amount that's available will be based on a "value-as-repaired" appraisal. The borrower must qualify for the loan under the standard underwriting guidelines.

3. Contact a hard money lender. This alternative is available to borrowers who have neither the cash or the credit credentials to qualify for an FHA or a Fannie Mae rehabilitation loan. These loans are called hard money loans and because they are riskier for the lender, the interest rate on these loans are higher than the prevailing interest rate. These may be good loans for investors who are looking for "handyman specials" and who hope to repair a property and resell it within a short time period. The borrower's qualifications are generally not a major concern for these lenders. An "as-is" and an "as-repaired" appraisal may be ordered to better determine the upside potential of the property.

Tips & Warnings

• In certain parts of the country, prospective buyers may want to have the home tested for Chinese drywall problems, since the presence of that material may require a complete re-installion of the property's drywall.

References

• U.S. Department of Housing and Urban Development: Rehab a Home w/HUD's 203(k)
• HomePath.com: HomePath Financing