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Financing for fixer-upper properties

LAUREN BUNTING ¦ Contributing Writer

(Nov. 16, 2012) Have you ever searched homes online, come across a house with a great price, but once you scroll through the pictures you see that it needs a lot of work, so you pass over it and move onto the next one? For those interested in fixer-uppers, there’s a loan out there just for this purpose called the 203(k) rehab loan.

The 203(k) program is the Federal Housing Administration’s primary program for the rehabilitation and repair of single-family properties. It’s an important tool for community and neighborhood revitalization and for expanding homeownership opportunities (there is also a 203(k) program available for Virginia loans).

Traditional mortgage lending requires the condition and value of the property provide adequate loan security, or in other words, that the house be in good shape. When rehabilitation is involved, lenders typically require any needed improvements to be finished before a long-term mortgage would be granted. With a 203(k) loan, a portion of the loan proceeds are used to pay the seller, or, if a refinance, to pay off the existing mortgage. The remaining funds are placed in an escrow account and released as rehabilitation is completed. The cost of the rehabilitation must be at least $5,000.

Since this program also applies to the refinancing of a house, it’s an important loan that will allow owners to finance the rehabilitation of their existing home, such as in cases of severe flood damage where an owner may not have had flood insurance coverage or if repair costs go beyond what federal flood insurance might cover.

The 203(k) program may be used to finance such items as painting, room additions, decks and other items even if the home does not need any other improvements. All health, safety and energy conservation items must be addressed prior to completing general home improvements.

— Lauren Bunting is a member of the Coastal Association of Realtors and a licensed REALTOR ® with Bunting Realty, Inc. in Berlin.

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