“Fixer Uppers” and FHA 203(k) Program: What’s the Deal?
As buyers in Northeast Los Angeles neighborhoods and districts like Highland Park, Glassell Park and Mt. Washington are learning, buying fixer uppers can be a wise decision.
“Fixer-Upper” homes are a great opportunity for potential homeowners to sink their teeth into a deal. Fixer-Uppers are houses set at a cheap price, but they need a lot of internal work. Unfortunately, the new homeowners have to pay for the remodeling out-of-pocket because the loan does not cover renovations. Therefore, if a new buyer does not have extra cash, they need to apply for loans with high interest rates in order to make their home livable. Luckily for them, the new FHA 203(k) program was created to help.
The federal government developed the FHA 203(k) loan in order to fund buyers with a loan that will help them purchase a fixer-upper and receive funding for repairs. For example, a run down house is on the market for 450K. The whole house needs a make over with new paint, carpet, and some wall repair work. A FHA 203(k) lender will investigate the home and determine that 100K is required for the repairs and will grant a loan for 550K. Once the loan is issued, the government allows a contingency reserve of 20% that will grant you more money if the repair fee exceeds the initial estimated cost. They also permit approximately 6 months worth of mortgage payments so that the buyer can live in a separate location while remodeling their home.
In older Northeast Los Angeles neighborhoods that run the gamut from small, inexpensive turn of the century cottages to fancy, expensive newer and midcentury homes, buyers are snatching up these loans.
Not all types of repairs are approved by the FHA 203k mortgage loans. There are two different types of loans. The basic 203(k) exists for properties that only need structural repairs like a new room or roof. The second, streamlined 203(k), is assigned when houses need non-structural repairs like painting. These are the repairs covered by the 203(k): decks, remodeling the kitchen and bathrooms, new siding, flooring, plumbing, patios, another story on the house, and central air and heating. A “luxury” improvement like adding a pool or basketball court will not be covered in the 203(k).
The basic and streamlined versions of the 203(k) each have their own spending limit. The FHA comes up with two numbers: 1) the cost of the property plus estimated repairs and 2) 110 percent of the property value once the repairs are complete. The FHA will grant the buyer the lesser of these two numbers. The benefit of streamlined loans allows you the purchase price of the home plus a maximum amount of 35K.
So popular and important is this program that it has been credited for helping regenerate older neighborhoods like Eagle Rock and neighboring Highland Park. So many homes in Highland Park have received facelifts that the entire area is going through a gentrification process that is raising home values.
These loans are beneficial to buyers because they allow funding for someone to buy a home and make repairs. The down payment is a minimal price and can be given by a family member, employer, or organization. Most 203(k) loans have low interest rates and discount points, however, these do vary depending on the lender. Unfortunately, not all properties qualify. In addition to that, there is a limit on funding and the application process for the loan is tedious. However, this loan is a great opportunity for people to make their dream homes come true.
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For instance, homes for sale in Mt. Washington often carry a stock of lower-priced homes needing a complete renovation. The same is true of homes for sale in Glassell Park, another older neighborhood a stone’s throw away from Mt. Washington.