Homebuyers who are looking for a good deal in a tight real estate market often consider purchasing a home that has been foreclosed and is being offered by a bank for resale. Although these may appear to be bargains, obtaining financing for this type of purchase can be difficult. Here, Mark Wells at Preferred Financial Services answers questions about buying a foreclosed or distressed property.
The house I want to buy is worth $150,000 and I can buy it for $100,000. Does that mean I can use the $50,000 equity as my down payment?
This is the number one question I get, and the answer is “no” in every circumstance. Lenders do not credit you with any standing equity you may acquire in buying the home. If the loan program requires a 5 percent down payment, you will have to put 5 percent down based on the purchase
price, regardless of the value of the home.
I have seen some real bargains in partially finished houses or in houses that need to be fixed up. How do I finance these?
For homes that do not need structural work, FHA offers a 203-K program which funds both the purchase of the home and the improvements you want to make to it. Down payment is still required, and it must be at least 3.5 percent of the purchase price plus the improvements made. As long as the repairs are cosmetic,
or you are repairing the basic operating systems of the house (appliances, plumbing, electrical, HVAC), you can use this program.
What if the home has structural issues?
If you are repairing the structure or adding any living space to the home, you will need an interim loan—essentially a construction loan or a home-improvement loan. Once the home is completed or repaired, you can then close on a permanent mortgage. It takes substantially better credit and more down payment to get a structural repair project financed, so do not plan on this route if your credit is marginal or
you do not have about 20 percent down payment in hand.
What if the house systems are OK, and it just needs some paint and cosmetic work?
If you can pull it off, the easiest way is to buy the house using standard financing, then put the ‘sweat equity’ into the improvements and do the work yourself after you have purchased it. However, if the repairs are beyond “cosmetic,” you will not be able to do it this way.
How do I know what is just “cosmetic” and what is “in need of repair?
The appraiser will have the final say in this, and it is somewhat subjective. However, the prevailing rule is that if the repair does not render the house unmarketable or unlivable, it is considered cosmetic.
Next week, Mark will cover more questions about
purchasing distressed properties. He welcomes
questions or comments and can be reached at
(864) 235-9596, or by e-mail at
Mark@TheGreatestRates.com.
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