Nov. 15, 2015
There are a lot of buyers in the Rogue Valley who are looking for homes at a price range below $200,000. This is a tough end of the market because a lot of these homes are not financeable for various reasons. Sometimes it’s just that they aren’t in good shape.
We’ve seen a lot of inventory of bank owned homes, whose condition can range from complete teardowns, do ‘so-so’ need some cosmetic work. But the biggest problem is finding financing from FHA and USDA lows, which are stricter on the healthy and safety conditions as well the overall condition of the structure. Imagine finding a home you can afford and finding out later your mortgage company won’t lend on it. The bank has a stricter policy because they are offering the buyer a loan with only 3% down payment, thus more risk associated with the mortgage and they must have value in resale should a buyer default.
So what are some alternatives to traditional financing options?
Private financing from local investors, what we call ‘hard money’. Our team works with and knows a handful of ‘hard money’ investors in Jackson County who in special circumstance will lend to a buyer for a home that won’t get tradition financing. The downside is that these investors will cost you a higher interest rate, usually a short-term loan and will likely require more money down. Which is ok, because this would provide the time and opportunity to make improvements on the home, invest your own money into getting the property financeable, then refinancing with a conventional mortgage lender either FHA/VA/USDA.
Just like any lender these investors still do their due diligence in qualifying you for this type of financing. They still do credit check, they still ask for your bank statements, work history, just to verify you can make your payments and have enough money to do as you plan. They will still have a lien on the property and can repossess it should a buyer default. The only real difference here is that the money isn’t coming from a bank. There usually isn’t an appraisal and can be bought as-is. We still highly recommend doing a home inspection regardless of your financing type.
Owner carry is similar to private money. We see this situation more often with un-financeable property or land. Old mobile homes, seriously poor condition of a home, or most likely with land purchases. Occasionally some sellers will offer owner carry. This would be when the owner owns the property outright and is willing to earn a percentage. More likely to happen when home loan rates are higher but again this would require more money down. Some buyers do require a credit check and a background check.
203k rehab loans are back by the FHA for home that doesn’t meet lending requirements for financing because of their condition. This is an arduous process, which requires careful attention to details regarding your plan to restore the home to a financeable state. In some cases this may only require replacing a roof but as much as a full jut and rebuild.
There are two types of 203k loans, a standard and a streamline. A streamline 203k is a loan situation that requires under approximately $36,000 in repairs. A standard is anything above $36,000 but no greater than 115% of FUTURE value of the property after the repairs are complete.
Let’s say you found just the right place….but it won’t finance. A 203k option is a good idea if you are willing to do the following in order to purchase the home.
• Find licensed, bond, and insured contractors that are willing to provide you with detailed bids for required repairs. You need to be able to trust these contractors as well as have them in line before you even make an offer on the home.
• Financing, have you applied for a 203k or gotten preapproved for a 203k? We have several lenders we work with that provide this service. Not all lenders do and we HIGHLY recommend you find a LOCAL lender for this type of loan. They will be deal intimately with your contractors and other service providers for the loan and property. If you choose to work with a non-local lender the turn around time will be extremely long and won’t get the best customer service.
• Get into contract with the owner. It may be that this is a bank owned home and it may take weeks or months to get a fully signed and executed contract to even proceed to appraisals and contractor bids.
• Once we have a fully signed contract we have to find and hire a licensed FHA 203k appraiser/inspector. To our knowledge there are two who have worked in our local area. This inspector will tell you what you need to do for financing and it is a good idea to have your contractor there while the inspection is taking place. We have worked with these inspectors with 203k loans before so we are familiar with the quality and detail these inspectors provide for your project. You will need to front the money for this inspection but it is worth every penny.
• Contractor and lender now go thru all of the bids for the work required and your loan amount is then estimated.
• Now the home will be appraised with the future renovations in mind. This is so that the bank knows that at the end of the project the homes value will be as much or more than the loan value.
• Close the transaction, sellers paid the initial contract price, the cost for repairs (your bids). As your projects are completed the contractors are paid out of escrow. There is no upfront money so the contractors have to float the money for repairs and then get paid when they are done. This is why it is so important to qualify your lenders and don’t just hire some Tom-Dick-or-Harry with a hammer.