Ways to Get Financing for Distressed Homes

Many properties in the current market – especially distressed ones or those that have been vacant for an extended period of time – can be good buys.

But they can also come with challenges.

The challenges could be significant damage from water or mold, or missing essentials like furnaces, hot water heaters or, in some cases, copper tubing.

Traditional mortgage programs, such as those offered by Fannie Mae and Freddie Mac, shy away from properties in need of major repairs or replacements.

There are other options, though, such as the increasingly popular Federal Housing Administration (FHA) 203(k) rehab program.

The program rolls the purchase price and estimated repair costs into one loan.

Let’s say you’re looking at a home with a purchase price of $100,000, and it needs $15,000 worth of work.

You would go to an FHA lender that handles 203(k) loans and get a loan for $115,000.

The first $100,000 would be disbursed at closing, with the remainder provided as the project progresses.

An independent FHA consultant is hired by the buyer, on behalf of the lender, to oversee the process and to protect the interests of you and the lender.

A general contractor is then selected.

A general contractor must be used, instead of doing it yourself or hiring someone you know to do it, unless he or she is a general contractor.

The contractor must have references and a line of credit that will allow him or her to pay for materials and services until he or she is reimbursed from loan proceeds throughout the course of the project.

Work must generally start within 30 days of closing and must be completed within 90 days of the start date.

Unraveling the Mortgage Rate Mystery

Mortgage rates are relatively low at the moment, but there’s little doubt they’ll begin creeping up. It’s important, then, to have some knowledge of how mortgage rates are determined and what the picture might look like in the future.

Fixed Interest Rates

Fixed interest mortgage rates are tied to the 10-year U.S. Treasury note and are indirectly tied to the prime rate. In today’s economic times, the 10-year note tends to be a more stable investment than the stock market. The demand for this type of security increases the price, which decreases the yield, which is tied to fixed mortgage rates, resulting in lower fixed rates. Once the demand for stocks increases and bonds decreases, the yield will rise, and so will fixed mortgage rates.

Adjustable Interest Rates

Adjustable mortgage rates, as well as credit card rates and car loan rates, are often tied to variable indices, such as the U.S. prime rate. The prime rate is the rate at which banks lend money to one another. It is presently at a historical low in light of the economy.

But when the economy starts to turn around, prime and other indices will be likely to rise, and this is to be expected, as they have been low for some time now.

Other countries, including Australia, have started to increase the prime rate, as they are seeing slight improvements in their economies. The U.S. prime rate should remain where it is now for the foreseeable future, but it will eventually increase.

Mortgages 101: A Look at Loan Programs

There are many differences between conventional and Federal Housing Administration (FHA) mortgage loan programs.

When considering the purchase of a home, it’s important that you compare the two.

If you’re looking to purchase a home using FHA, you must put down a minimum of 3.5% and you need a credit score of 620 or higher.

Regardless of the loan-to-value ratio, you’ll also pay an up-front mortgage insurance (MI) premium of 1.75% of the financed loan amount and normally there is a monthly mortgage insurance premium after that.
Homebuyers using conventional financing must put down at least 5% and have a minimum credit score of 720.

There is no up-front MI on conventional loans.

However, there is monthly MI on all loans where the loan-to-value ratio is greater than 80%.

Conventional financing will accommodate borrowers with credit scores as low as 620.

However, the premiums that are charged in such things as up-front fees or rate increases will usually make FHA loans a better choice for borrowers with credit scores in this lower range.

Income guidelines are more conservative with FHA than with conventional programs.

FHA is more liberal with credit, so it may be a better choice if you’ve had recent credit issues but make more than enough income to cover all your monthly expenses.

Conventional financing requires two months of liquid asset reserves.

This means you must be able to cover two months of the mortgage, including taxes and property insurance, from sources such as checking or savings accounts or a retirement account. FHA has no reserve requirements.

What Property Investors Should Know Before They Buy

With all of opportunities in the current market to purchase undervalued properties, people looking to get into the world of property investing might want to explore their options. But there are a few things to keep in mind.

Investors looking to finance an investment property must put down 25% to 30% of the purchase price and have a credit score of 720 or higher, with no history of foreclosure or bankruptcy in the last seven years.

Mortgage rates on investment properties are also higher than they are on properties in which owners intend to live. Conventional loan programs are the programs of choice for investors, as the Federal Housing Administration typically lends only on primary residences. Additionally, rental income must be documented in the form of a signed lease. Any prior rental income from other properties must go back at least two years and be supported by signed tax returns. Rental income is typically calculated at 75% of the amount on the rental lease, as lenders allow for what is called an occupancy rate, meaning there will be times when the property will be without tenants.

Asset reserves on investment properties are six months of principal, interest, taxes and insurance for each rental property owned.

If you purchased a multifamily property, though, and live in one of the units, you would be buying it as a primary residence versus an investment property. Anything with more than four units would require a commercial loan.