Ask The Expert
Ask The Expert
Buying a Fixer-Upper? There's a Special Mortgage for You
Dear Liz,
I am buying a house that is a fantastic deal but needs a bit of work. I was told that I could buy the home and then get a home equity loan to make the repairs, but then I heard that FHA has a loan that will let me finance the property improvements. How does that work?
Howard in Idaho
Dear Howard,
This is a great question. You are referring to the Federal Housing Administration's section 203(k) mortgages. This program allows you to get a mortgage to both buy your home and make repairs and upgrades to the property. This special home loan gets you the home purchase and the repairs with one set of closing costs and an ultra-low down payment of only 3.5% of the total acquisition (the purchase price plus the cost of upgrades and repairs).
Weighing the FHA 203(k) Rehabilitation Mortgage
Qualifying for the 203(k) home loan is the same as for any FHA loan, but your LTV (loan-to-value ratio, which is the percentage of the home's value that you can finance) is increased to 110% of the appraised value. You are bound by FHA loan limits in your county, and these loan amounts vary throughout the country. You may even be able to finance up to six months of mortgage payments into the loan as well, allowing you to skip mortgage loan payments while you remodel.
However, the 203(k) mortgages cost more than standard FHA loans, and those costs vary from lender to lender. That is why, in addition to making sure that your mortgage lender is approved to write FHA loans, you need to get mortgage quotes from several HUD-approved mortgage lenders and compare loan costs, interest rates, and terms. Only by shopping can you be sure of getting the best mortgage interest rate on your 203(k) loan.
Mortgage Help from Your HUD Consultant
If the cost of the work to be done exceeds $35,000, you'll work with a consultant with the US Department of Housing and Urban Development (HUD), who prepares what is called a work write-up. This write-up is forwarded to an appraiser to be incorporated into the final post-repair value of the home. When determining loan-to-value and how much they will approve, underwriters take the lower of the appraised value or acquisition costs (purchase price plus repairs). HUD consultants help make sure you don't overpay for the repairs by telling you what the cost should be in your area for the work being done.
Make Almost Any Home Improvement with a 203(k) Home Loan
Under this program, some of the things you can do are room additions, new flooring, new fixtures, bathroom and kitchen remodels, enclosing carports, installing new appliances, and repairs or upgrades to roofing, plumbing, and electrical systems. Anything health- and safety-related or anything considered functionally obsolete can also be repaired or renovated.
Choose Your Mortgage Loan Officer Carefully
These FHA 203(k) rehab loans are especially complicated, so in addition to getting a competitive mortgage quote from your lender, you want to make sure that your loan agent is exceptionally experienced and capable. Ask how many FHA rehab loans this person has originated and how long he or she has been closing FHA mortgages. Good luck with your renovation and thank you for writing.
Recently Asked...
Can I buy a home by taking over someone's mortgage?
I found a company that will sell me a list of homes that can be bought by taking over someone's mortgage. I have some credit and income issues so this would be very helpful to me. Is this a legitimate way to buy a home? Do mortgage lenders let buyers take over the payments if the seller is behind on the payments?
Taking over mortgage payments: the due-on-sale clause
Most mortgages funded in the last 10 years or so contain what's called an acceleration or due-on-sale clause. That means if the property changes hands, the entire mortgage becomes due immediately. Lenders don't want to find themselves in business with someone who may not meet their underwriting standards. While some government home loans like FHA mortgages may be assumed, unless the mortgage is over 20 years old, the buyer must qualify for the loan like anyone else.
How some people get around the due-on-sale clause
Some sellers will advertise an assumable mortgage with no qualifying, or that they'll allow the buyer to take over their mortgage payments. They try to circumvent the clause by transferring the property but not "selling" it. That dodge might mean calling the transfer a lease option, an installent sale, a land contract, a land trust or a wrap-around mortgage. These schemes are not illegal or fraudulent unless you conceal the transfer from the lender.
Could you get away with this? Maybe
If you take over payments from someone who is in default (and bring the account current) on an underwater home, the lender may breathe a sigh or relief and let you continue. But what if (when) property values or mortgage rates increase? In that case, you'd be in what's called "technical default" and the lender could choose to enforce the due-on-sale clause, meaning you'd have to pay off the entire balance immediately or lose the home. Unless you can get the lender to approve the transfer of the property and the obligation to you, you're taking a risk.
Concealing the transfer is a felony
If you try to avoid the technical default scenario by concealing the transfer, you're begging for trouble. A wrap-around mortgage, for example, involves the seller continuing to pay the old mortgage lender while you pay the seller. No transfer documents are recorded with the county.
The list is probably bogus
Unfortunately, the list being advertised is likely just a list of homes with FHA financing. You'd still have to apply and qualify with the current lender to take over such a loan, so don't waste your money.
Foreclosure sale: can you pay cash and then refinance?
I bought a home at a foreclosure sale with cash borrowed from my business. I need to put as much money back in as I can, and I need to do this as soon as possible. How soon after buying a home can I refinance it and get my cash back?
There are actually a few issues here; some need to be considered before others. So here we go:
- Is the property a home for you to live in, a vacation place or a rental? This determines what sort of refinance products you'll be able to choose from. For investment property or a second home, you'll need to refinance with conventional (non-government) mortgage lenders, and you'll be able to cash out a maximum of 75% of the purchase price. If the house is a primary residence, you may be able to refinance up to 85% with FHA or up to 90% with a VA refinance mortgage (eligibility guidelines apply).
- Do you want fast cash or more cash? If eligible for an FHA cash-out refinance, you can put up to 85% of the home's purchase price back in your pocket, but you'll need to own the property for at least six months before you're allowed to do it. With Fannie Mae's Delayed Financing Rule, however, you'd be able to refinance immediately and get up to 70% of your money back.
- What if the home's value has increased? In general, if you refinance within a year of buying a home, mortgage lenders base your loan amount on the lower of the purchase price or the appraised value. So even though you got a 15% discount by buying on the courthouse steps and paying cash, you won't get to pull that extra equity out when you refinance quickly. If you want to maximize your refinance proceeds, wait a year, and your loan is based on the home's appraised value.
This is a hot issue with investors these days because the best deals are generally unavailable to those who need to line up home loans. Investors need to recover as much of that cash as quickly as possible, so that they can turn around and buy more property.
Frequently Asked Questions (FAQ's)
I'm finally ready to buy my first home. How will the current economy affect my mortgage rates?
That depends on how much cash you're willing to pay up front and how well you've managed your money over the past few years. According to many experts, mortgage lenders have" rolled back" to the policies and protocols they used decades ago.
Hoping to avoid the kind of lending that led to the subprime mortgage crisis, most lenders
require higher down payments and higher credit scores from borrowers than they did only a few years ago.
If your credit has a few dings in it, don't worry. Be prepared to lock in something higher than today's best mortgagerates, and be prepared to pay extra origination fees in addition to your down payment. While you won't find many private lenderswilling to finance more than 80--90% of your home's value, investigate FHA and other community homebuyer options. You can use a stable employment history and community connections to find a fair financing deal.
Although I've made every mortgage payment on time for the past five years, our whole neighborhood has lost value and I'm upside down on my home loan. What should I do?
In certain cases, you might not have to do anything. If you locked in a solid mortgage rate during a previous period of low interest, keep making your payments. As real estate values normalize over time, you'll eventually regain home equity.
However, if your credit score is better now than it was when you originated your home loan, you may want to lock in today's best mortgage rates. Or you may qualify for a government-backed plan that can help your mortgage lender process a refinance. FHA, Freddie Mac, and Fannie Mae all have special money-saving programs. If your mortgage is backed or held by these entities and you meet some other qualifying criteria, you can cut the amount of interest you'll pay over the life of your loan.
