Bank Owned Property, No Kitchen….No Problem!

Since bank owned and distressed properties have come to dominate the multiple listing services I have had many requests to provide financing on homes with missing bathrooms, gutted kitchens and damaged roofs. Unfortunately until recently the only available option was an FHA 203K loan which only worked for individuals purchasing an owner occupied residence.  Traditional conventional mortgage financing would not accommodate a distressed property; so many home buyers were unable to take advantage of this segment of the market.

There is now a new program to help with distressed and bank owned properties. It is called FNMA HomeStyle.  It allows the homebuyer to build the cost of the renovation into their financing and close the escrow before the repairs are completed making distressed properties more attractive to homebuyers.  Some of the program highlights are as follows:

• Financing can be a primary residence, second home or investment property
• The final Loan Amount is based on the “as completed value” or the appraised value plus renovation costs whichever is less. So the cost to repair is financed into the loan amount reducing the cash needed by the home buyer.
• Up to 35% of the “as completed value” can be used for the repair. For instance if you have an $110,000 “as completed” value then $38,500 can be the total renovation costs.
• As little as 5% down payment on an owner occupied home, 10% down payment on a second home and 25% down payment on an investment property.
• Can be used with conforming High Balance Program allowing home buyers to purchase homes in Los Angeles, Orange County and Ventura Counties with a loan amount up to $729,750. In Riverside and San Bernardino Counties with a loan amount up to $500,000.
• If the buyer is an investor they cannot have more than four financed properties INCLUDING the purchase of the subject property

While the property is in escrow the home buyer must select a licensed third party contractor to perform the repairs.  The homebuyer cannot be the general contractor. They will need to provide a construction cost breakdown and contract. The appraiser will appraise the property as thought the items listed in the contract have been completed. The buyer and contractor will have 60 days to complete the repairs.

HomeStyle is also available for refinance transactions for homeowners that are making improvements to their home. It is considered a no cash out refinance so has better terms and poses less risk than a variable rate home equity line of credit.

In a time when the common perception is that lending parameters are tightening and costs rising this program allows buyers to take advantage of a market they were previously closed out of due to a lack of financing options.