Now that you purchased that distress home, what’s next? Sometimes, distressed properties are in need of repairs, especially if they have been vacant or not maintained by the property owner. Repairs were usually thought to be paid for either out-of-pocket, negotiated with the home seller, or some interim financing covering acquisition and construction used which would then be transformed later into a longer term loan post construction.
Construction loans are not as easily obtained in today’s market. However, a product that has been rising in popularity and many purchasers are using is the HUD 203(k) loan. Oddly, the program has been around for years, but has been gaining traction as lending requirements have tightened. The loan can help cover repairs and construction costs for owner occupied homes and non-profits (this program does not cover investors). There are rules and requirements to this program, feel free to contact your approved lender, or view the requirements on HUD’s website .
There are a few major points of this program that borrowers should check against to see if they qualify. First, funds dispersed for construction cannot go towards exterior construction. A maximum loan amount of 100% of after-improved value is allowed. A consultant is assigned to your file at buyer’s expense; they examine the exhibits for the home and analyze costs and allow for funds to be dispersed financing the next stage of construction, generally up to five draws are allowed. Construction must begin within thirty days from agreement, allowing roughly up to six months for work to be completed.
This has been a great alternative to home buyers, lowering inventory by removing distressed properties from the market which currently dominates the percentage of real estate transactions. In the week ending October 30th, single family sales of short sales and foreclosed homes were 42% of total transactions in comparison to traditional sales. Traditional sales of multi-units were outpaced by short sales and foreclosures which were 65% of the sales. Although the program has existed for years, it has gained popularity recently due to rise of distressed properties and lending difficulties. You may want to speak to your lender about loan requirements, guidelines and cost.
Sherwin L. Sucaldito, REALTOR®, GREEN, ABR, CRPM
The Institute of Luxury Home Marketing
Green REsource Council, GREEN
Accredited Buyer’s Representative , ABR
Certified Residential Property Manager, CRPM