The standard procedure for a situation like this is for the buyer to take out a mortgage on the home for its purchase price, and then an additional loan to cover repairs and upgrades. Both of these loans are typically made at a very high interest rate with a short amoritization period — that is, the money costs a lot to borrow, and you must pay it back relatively quickly. During the housing bubble, the shortcut was to buy a house, let it increase in value (in some cases almost overnight), and then refinance at the higher value and use the difference to fund the needed repairs and upgrades. But this is no longer an option for the average homebuyer, especially in today’s depressed market where homeowners can no longer count on rising home values to fund home improvements.
Thankfully, there’s a fantastic government program to help you get around this obstacle. The U.S. Department of Housing and Urban Development (HUD) offers something called Section 203(k) financing for folks looking to buy and renovate a fixer-upper or distressed property. Also called “renovation financing” or “rehab loans”, 203(k) financing allows you to get a federally-insured mortgage for the projected value of the home after rehabilitation. The mortgage has standard terms, including a lower interest rate and extended amoritization period. You can get 203(k) financing on any one- to four-unit dwelling (including projects that involve converting a multifamily to a single family, or vice-versa), including approved condos.
While you can’t use 203(k) financing to complete luxury upgrades on your home, you can do all kinds of basic improvements, such as painting and tiling, adding a deck, or building an addition. You are required to satisfy a series of criteria for energy efficiency (weatherstripping, insulation, etc.) in addition to meeting all of the usual procedural requirements for the loan. Read all of the exciting fine print here.
With so many foreclosures and distressed properties on the market right now, it pays to know about programs like 203(k) rehab loans. There are plenty of opportunities out there for the taking…if you know how to get them.