203 (K) Loans

Homebuyers often rely on various mortgage products to facilitate their financing needs. Buying a home that needs above-average repairs or substantial improvements generally requires a specialized loan program. A 203(k) mortgage loan through the Federal Housing Administration (FHA) might provide the funding needed to procure a distressed property. A portion of the financing is used toward purchasing a property, while the remaining balance gets reserved in an escrow account for disbursements upon verification of completed repairs.

Financing

Properties that require extensive repairs may create financing challenges for prospective homebuyers. Lenders generally reject financing requests for homes that have a nonworking kitchen, structural damages, or other items that could disrupt a family’s living conditions. Traditional mortgage lenders would require the seller to repair certain items before the settlement of escrow. Buyers can use a FHA-backed 203(k) mortgage as a single financing product toward acquisition and rehab costs.

Purchase Transactions

Borrowers may use a 203(k) mortgage loan to purchase an owner-occupied property. The maximum loan amount for purchase transactions is capped at a property’s sales price or the market value, and the actual loan size is respectively considered according to the lesser of the two variables, plus property repair costs. Lending limits for purchase transactions may be based on 110 percent of the property’s after-repair value. Using the lesser financing amount from the aforementioned methods, the final loan amount is based on a loan-to-value factor.

Refinance Transactions

Refinance loans for a 203(k) mortgage are based on two scenarios. Financing may be provided for a subject property with existing liens, plus the projected repair costs, and certain closing costs. Lenders might base a loan on a property’s market value, plus repair costs, or 110 percent of the after-repair value. The latter option is subject to a loan-to-value factor. If a borrower has owned a property for less than 12 months, the 203(k) loan will be based on the purchase price and documented repair costs.

Considerations

A 203(k) mortgage loan provides long-term financing for borrowers who need funding for distressed properties. Alternative solutions to a 203(k) mortgage often require a buyer’s use of personal savings or other sources, such as a loan from family members or private lenders. A particular caveat of the 203(k) loan program enables a borrower to incorporate up to six months of mortgage payments into the loan. During the property repair stages, a payment may be made toward the borrower’s monthly 203(k) mortgage payment.

If you have any questions about buying or selling a home or other real estate law questions, contact The Law Office of Joseph A. DiPiazza, LLC at (201) 494-2800.