Buy a Home That Needs Repairs

Posted by Professional Realty on Thursday, September 24th, 2015 at 11:18am.    17645 Views

Buy a Cheap House, Do my Own Repairs, Save Money?

buy a cheap house, buying a foreclosure, buying a fixer upperAh, so many have dreamed it; buying a cheap house with potential and fixing it up themselves.

That would be ideal for some, for others it can possibly mean biting off more than one can comfortably chew. There's another common problem inherit with that idea for most, however.

Unless you can purchase in cash, you cannot do the repairs yourself. The FHA (Federal Housing Authority) doesn't allow buyers to perform their own repairs if they are financing any portion of the sale and work must be done by FHA certified contractors. It doesn't matter what lender you use either, the rules are the same.

Before you get saddened by this fact, understand a couple of things and there's good news too. First, the law is in place for good reasons. Many buyers with good intentions purchase and start renovating, but a good number run into unforeseen financial issues, run out of funds to complete the work and some just simply don't have the expertise to properly address all concerns whether purely aesthetic or functional. 

This brings the value of the house down, and consequently the value of surrounding properties. However, that's where the beauty of an FHA renovation loan like a 203k or 203b streamlined loan product. FHA loans have very low downpayments, only 3.5% and funds for needed repairs or renovations can be structured into the loan. Some "as-is" properties are priced lower because the needed repairs have a negative effect beyond what just the bones are worth, and therein lay the opportunity.

Buyers still have a lot of leeway and choice of materials and colors i.e. type of siding, windows, carpet, paint etc. Additionally, once the home is purchased and the work completed you can, of course, continue remodeling and upgrading.

Debt-to-Income Limits. Generally, your front-end and back-end debt ratios should be 28 percent and 36 percent or lower. FHA limits are currently 31/43, though these can be higher with justification from the lender. VA limits are only calculated with one DTI of 41 as of August, 2015.
Some buyers will ask what type of home is best for them or the best deal; foreclosure, HUD home, traditional sale. I can tell you from years of experience, no one type is actually better than another, but seek to find the property that's affordable, meets your needs and that you'll be happy with. Everything else is just a matter of keeping an open mind and being creative. Depending on where you buy, different programs and incentives are often available via city, county and state programs.
To help you along with your understanding, here's a mortgage calculator that include PMI (Private Mortgage Insurance for loans with less than 20% down; some lenders can exclude PMI on loans of 10% down). and also a debt to income ratio calculator.
If you're looking into buying a home in SW Ohio, my business partner Marty Snyder is one of Ohio's top 5% of Realtors with sales and service and intimately familiar with all types of homes and financial arrangements. 513 292 9374. 

2 Responses to "Buy a Home That Needs Repairs"

adam wrote: hey greg, thanks for this info. question for you - who determines how much you get for the repair budget?

Posted on Thursday, October 1st, 2015 at 3:29pm.

Greg Hancock wrote: Heya Adam, thanks for reading. After a lender looks at your debt to income ratio, you'll know how much you're pre-approved for. Let's say your pre-approval is for $150,000. For one type of FHA the standard budget is a max of $35,000, but there are two appraisals to consider; first, as-is appraisal, and then after-repair or ARV appraisal. The maximum available is determined by the spread between the two appraisals.

Posted on Thursday, October 1st, 2015 at 3:40pm.

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