Sales of previously owned homes has slowed some, mostly due to a lack of inventory. In Hawaii, the bulk of sales are previously owned homes, as we don’t have large amounts of new development. After a long stretch of a seller’s market, a good portion of the inventory that’s available could be considered “not ideal”.
In a recent discussion with representatives from the local major banks, everyone brought up the same growing concern – many of the new mortgage applications are transactions that have collateral issues. Meaning, the actual home the applicant wants to buy has issues. We sometimes focus so much on credit, income, and down payment, we often look over the 4th major component of any transaction, the property itself. Now with shrinking inventories, prospective home buyers feel they are faced with either only two options: continuing a fruitless search for the home they desire, or give up and continue to rent.
I suggest a third option – purchase a property and fix it up.
Most consumers are unaware that there are several great programs that allow for the purchase of a home and do renovations – all in one loan. The primer below is to give you an idea what’s available. For more information on any of these programs, consult a mortgage renovation/construction expert. Loan programs like renovation and construction require specific knowledge and experience. I know when I did my first construction loan 20 years ago, I was truly lost. Now today in our highly regulated industry, working with someone who doesn’t regularly do these types of loans is a recipe for disaster.
FHA – 203(k):
This government program comes in two flavors, “standard” and “limited”. The standard 203(k) program allows you to buy an existing home and make major renovations. You can add bathrooms and bedrooms. You can renovate a kitchen. You can repair issues that would prevent you from obtaining “regular” financing. The limited 203(k) version allows up to $35,000 in costs for non- structural (permanently affixed improvements that add value to property). This would include a new roof, built-in appliances, news doors and windows, and fixing non-structural termite damage. One of the best features of this program is, since it is FHA, it only requires 3.5% down. The downside is that FHA loans have financeable up-front fees and mortgage insurance that never goes away. This program is also restricted for use as a primary residence only.
The HomeStyle Renovation mortgage, a Fannie Mae product, enables the borrower to obtain a mortgage for a purchase transaction or refinance, and receive funds to cover the costs of repairs, remodeling, renovations or energy improvements to the property. It is a single loan for purchase or refinance and the renovation funds. The loan amount is based on the as-completed value of the home rather than present value. Renovation funds are limited to a maximum of 50% of the as-completed appraised value. With this program, you can put as little as 5% down. This program is also available for all occupancy types – primary, 2nd home, and investor.
Shared Equity Renovation/Construction:
Do you want to purchase a property that needs major renovation or an addition and you already own a home? This may be the solution for you. You can tap into the equity of your existing home to finance the purchase and repair/renovation of the new property. This program is available for all occupancy types. There are also no restrictions on what you can and cannot do to the new home.
Yes, you can always purchase a property and get a standard construction loan for the renovations. These loans require you to contribute a minimum 20% towards the purchase price and renovation costs. The standard construction loan can also be used to buy a property for teardown and complete new construction.
I could never go into detail, and there are lots of them, as to how each of these programs work in a forum like my weekly newsletter. The purpose today was to start you thinking that if all you are finding in the marketplace are properties that are run down, have deferred maintenance, are dated, or are simply insufficient for the size of your family – there are options.
If you are thinking that one of these programs may be the solution to your house hunting dilemma, I cannot stress the importance of speaking to a highly qualified mortgage professional that regularly does these types of loans. Even someone like myself, who does these types of loans all the time, still needs to double and triple check everything to make sure what you want to do is attainable. Seeking information from someone in the mortgage industry that has never, or rarely does these types of loans, is setting yourself up for disaster.