By John R. Rapasky

            You comment, we listen.  Since the last post, many of you commented that you wanted more information regarding this topic.  This post discusses 3 different loan programs for the purchase of distressed property.  We work with lenders who provide all 3 programs and would be happy to help you with your scenario.  

            The first is the use of an escrow holdback.  An escrow holdback can be used on an investment property, primary residence, or second/vacation home.  An escrow holdback is where the cost of the repairs are kept in an escrow account at the title company and are paid directly to the contractors upon completion of the work after close of escrow.  Lenders will review these on a case-by-case basis to determine whether they can close the property in its “as is” condition, with the improvements to be completed after closing.  The lender needs to review and approve the final bids of the contractors before closing.  

            The second program is a construction/renovation loan.  This program applies to a primary residence.  In this program, the cost of the improvements is added onto the sales price.  The maximum loan amount is 75% of this amount.  There are two approvals on these loans – one for the construction project, and the other for the credit and income qualification of the borrower.  For the construction, the plans, specifications, cost breakdown, draw schedule, and other pertinent construction documents are submitted to the lender’s construction department.  These documents are reviewed and approved by the lender.  Likewise, the borrower’s loan application, credit, and income documentation are sent to the lender for review and approval.  Both the construction project and the borrower’s loan application must be approved before the construction project begins.  If both are approved, construction can begin after closing.  During construction, draws are made to the contractors based on work completed.  Payments on the loan are made interest-only on the cumulative amount drawn.  Once the work is completed, repayment of the full amount of the loan begins.  There is no need for another review of the borrower’s qualifications at this point.  These loans are called “one-time close construction loans” because they close only once before construction begins, and do not have to be reviewed again after completion of construction.  

            A third program, which has gained popularity in this market, is the FHA 203(k) loan.  This program applies to a primary residence.  This is also a loan where the costs of the improvements are included in the loan.  However, this is not a construction loan, rather it is a renovation loan.  The loan amount is limited to the maximum FHA loan limit, which is $346,250 in Maricopa County.  One highlight of this loan is it only requires the FHA minimum 3.5% down payment.  However, it does require mortgage insurance and typically has higher rates than the construction loan mentioned in the preceding paragraph.  There are two different kinds of these loans, the Streamline (k) and the Standard (k).  The Streamline (k) allows for limited plans of renovation with the projects done by different specialized contractors.  There is a maximum cost of $35,000 on a Streamline (k).  The Standard (k) involves comprehensive repairs completed by a general contractor.  The work requires drawings and blueprints.  There is no maximum cost, just the maximum FHA loan limit.  The Standard (k) also requires a hired consultant to oversee the project.  

            As you may have gleaned from the discussion of the above programs, contractors are required to do the work, rather than the borrowers themselves.  Nevertheless, notwithstanding the condition of the property, there are lending options available to finance your transaction.  

            John Rapasky is the President of the Counsel Mortgage Group, LLC.  You can learn about them at www.counselmortgage.com.  Copyright © 2009 Counsel Mortgage Group®, LLC

By John Rapasky

            Did you know that if a home has water spots on ceiling tiles, broken windows, is missing a stove, or missing cabinets or countertops, the lender may not lend on the property?  There are many properties that are very well priced, but they are in disrepair or missing pertinent household items.  If this is the case with your property, make sure you work with your lender.  There may be ways to overcome these deficiencies and still get a loan on the property.  This post will discuss some of these options.  

            One way is for the parties to negotiate the repair of the items before closing.  As long as the items are repaired before closing, the lender will loan on the property.  However, there are competing interests between the buyer and seller that can make this a difficult proposition.  For example, the buyer will not want to pay for repairs on a property that it does not own.  The seller will not want to make the repairs in the event the buyer cannot qualify in the hope of holding out for a cash buyer.  Nevertheless, if you have a willing buyer and seller, the parties can find a mutually beneficial ground.  For instance, if the buyer is approved, you may consider an offer to make the earnest money non-refundable, have the seller make the repairs, and if the buyer does not close, the seller will keep the earnest money in exchange for the completed repairs.      

There are specific loan programs that are tailored for distressed properties.  If the buyer has a conventional loan, you may want to consider an escrow holdback to repair the items after the close of escrow.  The items would have to be approved by the lender before close for completion by the contractor after close.  The cost of the repairs would be deposited with the title company, for distribution directly to the contractor after completion.  There are construction loans, where the cost of improvements can be included in the loan, such as the FHA 203(k) loan.  If the home is owned by Fannie Mae, the Homepath loan allows for light renovation.  

In sum, the fact that the property is distressed should not discourage the parties from obtaining a loan to finance the transaction.  If the parties work together, or the buyer finds the right loan program, the loan can close.  We can help buyers work through these issues and are happy to help you.   

John Rapasky is the President of the Counsel Mortgage Group, LLC.  You can learn about them at www.counselmortgage.com.  Copyright © 2009 Counsel Mortgage Group®, LLC