203K offers path to rehab foreclosures

Many prospective homebuyers initially think of foreclosures and short sales as the way to get a bargain home. Unfortunately, most experience a shock when they see the condition of most of those "bargain" properties. The vast majority need at least some level of rehab conditioning - paint and carpet being a minimum level to start, but there's usually a number of both minor and major fixes needed beyond that.

For those that can envision a home after it's fixed up, the FHA 203K program can provide the funds needed to make improvements. The 203K allows a homebuyer to include up to $35,000 of upgrades into their mortgage, but it does take some effort to make it happen.

The first thing to expect if you use a 203K is that it will take longer to process and there's additional significant paperwork (which your lender should assist you with). Closings are currently running an additional 15 - 30 days over a standard loan. Additionally, the homebuyer will need to line up estimates from contractors for the improvements to be made and supply those to the lender.

The biggest hurdle to get over with the rehab loan is the appraisal of the "as improved" value of the home. In a typical home purchase, the appraiser is looking simply at the current "as is" value of the property and your loan is approved (or not) based on that value. With the 203K, they must make a determination of the home's value after the work is done. There is some flexibility with the value assessment relative to cost of improvement, but essentially the lender needs to see that it will be a worthwhile investment.

After the loan closes, funds are disbursed to contractors once work is complete and inspected. Keep this in mind when lining up contractors that will perform the work as they need to understand the 203K requirements for payment.

If you are looking at homes that need work, keep the 203K in mind as one possible option for finding the bargain home and making it livable. For more information about the 203K program and whether it would work for you, visit the official FHA Website.