The FHA's 203(k) loan can help you buy a fixer-upper

Here’s a common scenario that homebuyers face when they want to buy fixer-uppers: The buyers need to finance the purchase with a mortgage, but the mortgage lender will only provide funds for homes in good condition.

In today's market, many foreclosed and short-sale homes need major repairs since their owners couldn’t afford basic maintenance. Buyers who would like to earn sweat equity through purchasing and rehabbing such properties are often shut out of the mortgage market.

But the Federal Housing Administration's 203(k) program makes it possible for these types of would-be owner-occupants to get loans for fixer-upper properties (the 203(k) program is not available to investors).

If you're interested, here are a few things you should know about 203(k) loans:

-A seller might be reluctant to accept a purchase offer that’s contingent on FHA 203(k) financing because of the extra time and uncertainty involved in closing these loans.

-The program allows homeowners to do their own rehab work, but it will hold you to professional standards.

-You’ll be allowed a maximum of 6 months to complete the work whether you hire professionals or do it yourself.

-While loan proceeds can only be used to pay for professional labor--not homeowner labor--doing the work yourself could mean a smaller mortgage.

The FHA 203(k) program isn’t for the faint hearted. It takes two of life’s most expensive and stressful transactions--buying a home and doing major renovations--and adds mortgage lenders and government, two of the most difficult institutions to work with, to the mix.

But this loan program can make an otherwise impossible home purchase a reality for determined homebuyers.

For more information about this type of loan, see my articles: 

The FHA 203(k) mortgage: Home renovation helper

An Introduction to the FHA 203(k) Loan

Applying for an FHA 203(k) Loan

How to Finance a Fixer-Upper

HGTV's "House Hunters" Finally Explains How Young Homebuyers Finance Fixer-Uppers

When you're just starting out and buying your first home, where do you get the cash to fix it up if it's not already in great condition?

Lots of first-time homebuyers find themselves in this situation: They're ready to own and they have enough income and savings to qualify for a mortgage, but they can barely afford the type of home and/or neighborhood they want to live in, and the home might need lots of improvements and renovations to fix deferred maintenance and outdated finishes.

If you watch House Hunters on HGTV, you've probably seen lots of homebuyers in this scenario. Something that's always bugged me is that the show doesn't explain how a cash-strapped young buyer can afford to renovate a fixer upper.

Finally, last night, I saw an episode called "22-Year-Old Seeks Victorian Fixer-Upper in Pittsburgh" that addressed this issue. The young woman said she had secured an FHA 203(k) loan so she could buy a fixer-upper. She had qualified to borrow $150,000, a sum that would have to both cover the purchase price and the renovations. She ended up buying a $70,000 home, which gave her plenty of funds to improve an old Victorian in an up-and-coming neighborhood.

The episode still didn't get into the details of how the 203(k) program works, so if you'd like to learn about a loan that can help you buy and renovate a fixer-upper, check out my recent article, "How to Finance a Fixer-Upper."