Buying a Short Sale Home using an FHA 203K Streamline or Homestyle Renovation Loan
In today’s market there are many homes for sale that are listed as a “short sale”. Often these homes are vacant with the former owners having already moved on.
They are called “short sales” because the current mortgage holder has agreed the home can be sold for something “short” of what the current mortgage balance is without the current home owner having to make up the shortage in cash. Usually the shortage is forgiven by the current mortgage lender just to avoid a long and expensive foreclosure process or to perhaps avoid the risk the home owner will damage the house in some major way during a lengthy foreclosure process.
But many of them have some minor issues or non-functional mechanicals or even missing light fixtures etc. that make them very difficult to finance with a regular purchase mortgage. These items might be holes in walls, a few copper pipes missing around the hot water tank, missing carpet on stairs and maybe a few broken windows or missing kitchen cabinet doors. These items make a normal purchase loan almost impossible to get approved and closed as an Appraiser for the lender will note these items on an Appraisal Report with pictures so the lender’s Underwriter can see them. The reason why is that these non-functional items, material defects or missing items affect in some way the safe, secure, healthful or sanitary use of the home by the new buyer. As such the new lender may not want to take the risk of approving a mortgage on such a property without these items being repaired first to bring the house back to being fully safe to use and occupy.
While generally minor in nature these are issues a home buyer may come across in trying to buy and finance a home sold on a “short sale”. Many times a home listed as a “short sale” offers an asking price below what the market might be in the local area due to the current condition of the house. So they can be popular with buyers as a way to get more for their money in effect or buy into an area that would otherwise be beyond their price range just due to the reduced condition of the house. A solution to that problem is to use either a Streamline FHA 203K or Fannie Mae Homestyle purchase mortgage. In this way the “short sale” buyer can borrow a minimal amount on their purchase mortgage to allow the repairs to be made after closing which may even raise the value of the house. An FHA Streamline loan is one less than $35,000 in repairs and does not require the use of an FHA Consultant. Or a Fannie Mae Homestyle can also be used in the same way for minor repairs. The buyer would have a contractor write up a proposal with costs for labor and materials to make the house fully safe to use again. It can be as little as $5000 for example. The repairs may just consist or repainting the house and fixing any holes on the walls. Or maybe a new Hot water tank & furnace/AC unit is all that is needed. The process is straight forward in using a Streamline 203k or Homestyle for these minor repairs not involving a complete renovation of large portions of the home. Most are completed in less than 30 days allowing the home buyer to move into the house fairly quickly after closing once repairs are complete.
The point here is that buyers should not be afraid of the condition of the home on a “short sale” if they feel they are getting a good deal on the house they really want.
An example might be a “short sale” home sold for $100,000 missing the hot water tank, a broken furnace, carpet torn off the stairs revealing just a dangerous uneven plywood sub-floor meant to be covered for safe use and a few missing light fixtures. All total it will be $9000.00 to do these repairs. The buyer would use a Streamline 203k for example for the $9000.00 plus a 15% emergency reserve of $1350 for any unforeseen repairs that are discovered during rehab for an FHA Streamline loan total calculated as below:
- FHA 203k Streamline minimal 3.50% down payment based on $100,000 purchase price plus the $9000 base repair budget and plus the 15% of that as Reserve of $1350 is a total of 110,350 X 3.50% = $3862.25 down payment of 3.50% of the total.
- The Contingency Reserve is required and is 15% due to not all utilities are working. This protects the buyer against unforeseen costs that may arise during repairs. If not used it is subtracted from the final loan size.
- We assume the Seller has paid all closing costs and up front FHA mortgage insurance premium in this example.
- The new 203k Streamline loan then is for $106,487
- In this example the house is Appraised at the future value with these repairs completed as all 203K and Homestyle mortgage loans are to be $120,000.
While just an example it illustrates how buying a “short sale” requiring some minor repairs/replacements can be done and may even result in an increase in value over the amount invested.
Please send me any questions you may have!