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Sunday, December 15, 2013

Renovation Mortgages and how they work...

HUD & FHA has the 203K loan and Fannie Mae the HomePath Renovation Mortgage; but what are these things and what are the rules?

Both of these mortgages are aimed at modest income buyers who intend to live in the fixer-upper homes that they are buying. They do not apply to investor purchases. Both are set up to allow the borrower to borrow more than the sale value of the house, so that they have money to pay for the improvement of a property that may be run down or damaged at the time of the purchase.

During the depth of the recent Great Recession many homes were foreclosed by lenders or ended up on the books of HUD, FHA, Fannie Mae or Freddie Mac. Oft times the foreclosed owners would strip the house on their way out, taking all of the appliances, lighting fixtures and anything else they could easily remove. If the owners did take it, thieves and vandals often stripped these house, sometimes even taking the copper plumbing out of them., leaving empty hulks that were not habitable.

For a long while, these damaged foreclosed houses were mainly bought up by investors at very low prices and then rehabbed and flipped back on the market. Investors made quite a good living doing that while the prices were depressed. More recently, with prices rising, investors have stepped back out of the picture and people who want to buy a house to live in have been the primary buyers. Programs like the 203K loan and the HomePath Renovation Mortgage were invented to encourage that owner-occupied trend, by providing a means for the buyer to get the money needed to rehab the houses up front, as a part of the mortgage.

The idea behind these special mortgages is fairly simple – a buyer gets estimates on the needed repairs and commits to make those repairs with the extra money within a specified timeframe. Also, the requested money and the repairs that they will fund must make sense in terms of actually increasing the value of the home up to the total value of the loan. So, an appraiser and the banks make the call that the house will be worth the amount being borrowed, once the repairs/updates are made. With a regular FHA 203k, the maximum amount you can get is the lesser of these two amounts: 1) the as-is value of the property plus repair costs, or 2) 110 percent of the estimated value of the property, once you do the repairs. HomePath has similar loan limits.

There are quite a few rules in place in either program to make sure that fraud doesn’t occur and to limit the participation in the programs to those with true need. The bottom line on these programs is that you can get the money needed to make the house habitable, including buying new appliances to replace those that might have been removed and to make repairs, but only up to a reasonable limit and only if the house and you qualify under the programs guidelines.  Rather than try to explain those guidelines in detail, I have researched some good reading for you to do on these programs.

So, do the reading below and learn about these programs. You should be able to tell fairly quickly whether or not you might qualify. Then, get with your lender and see if they have products that support these programs. If not, find a lender that does do these loans. You can get a new home, even if it needs work before moving in, by taking advantage of these programs.


To read more about HomePAth loans go to –


Freddie Mac has a similar Renovation Mortgage program, which you can read about here –

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