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Real estate Q&A: Apply for 203K loan to fix up house

RIO RANCHO, N.M. — Q: I found a great house in the neighborhood I want. The problem is, the house needs some work and my Realtor says it won’t pass an Federal Housing Administration (FHA) appraisal. What should I do? I can’t afford this area unless I buy a fixer-upper, and the seller can’t afford to do the work that’s needed.

A: This is common because the FHA, which provides loans, requires that a home be in a habitable condition.

You want a certain neighborhood, but can’t afford it unless you find a house in need of repair. The good news is there’s a solution. FHA provides a loan called the 203K. It increases the amount of your loan so you can use the additional funds to make non-structural repairs or updates. If you were planning to use an FHA loan, you should be eligible for the 203K.

There are some financial limitations. In Bernalillo County, FHA will only lend $271,050 for a single-family residence. The limits are higher for duplexes and larger properties and vary from county to county and state to state. If the house is above the amount mentioned, you might look into a conventional construction loan. It functions similarly to the 203K, but you’ll need a higher down payment, higher credit score and other details of how the programs function may differ. The good news is, you only need 3.5 percent of the purchase price as a down payment.

What’s amazing about the 203K loan is you can borrow between $5,000 and $35,000 on top of the purchase price up to 110 percent of the final appraisal value. Here’s how it would work: You find a house for $225,000 that needs some work. The appraiser feels it will be worth $250,000 after completion. You’ve gotten estimates, so you know the work will only cost about $25,000 but you want to borrow the max so you can do new flooring and windows on top of the really necessary stuff. Well, 110 percent of the final value is $275,000. Not only is that above the borrowing limit for FHA, it is also more than the $35,000 maximum. So, in this scenario, the most you could borrow is $260,000: $225,000 for the purchase and $35,000 for repairs.

There are some other requirements to the loan. You must have all of the work done by one single contractor. That contractor can use different people as needed, but it must be one bill, to one licensed general contractor. You cannot do the work yourself. The work must be completed within six months. The money is released half up front to the contractor and half when the work is completed.

Ask your lender about the 203K. It’s very specialized and not all lenders offer it. But it really is a great option. So even if it means changing lenders, it might be worth your consideration. Good luck with the house!

Talia Freedman is a Realtor with Signature Southwest Properties
— This article appeared on page 13 of the Albuquerque Journal

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