The FHA (Federal Housing Administration) in the Department of Housing and Urban Development (HUD) has a special mortgage program for the purchase of “fixer-uppers” known as the Single - Family Rehabilitation Loan program (203k). There is also a program 203b, known as The Energy Efficient Mortgages Program (EEM).
The increasing of the FHA loan limit to $729,750 for 2009 makes these programs potentially more useful, than in the past, in our area. HUD does not lend the money to you directly but insures the loan that you receive through an approved broker or from a lender.
The HUD 203(k) program allows qualified buyers to purchase the property with protection should the repair and renovation process cost more than expected. The borrower can put down as little as 3.5% of the loan amount. The down payment can be a gift (not a loan) from a family member, employer or charitable organization.
The proceeds of the loan may include the projected value of the property when the rehabilitation is complete, remodeling costs and certain closing costs. The loan can also include a contingency reserve of up to 20% of the total remodeling costs to cover appropriate unanticipated work and/or change orders. This loan has a feature that allows you to include up to six mortgage payments added to the cost of the rehabilitation work. The amount of mortgage payments built into the loan may not exceed the number of months estimated to get the work completed. Unlike loans that require problems to be cured before funding the purchase the 203k allows you close on the home and complete the improvements later.
The money isn’t paid out all at once. The costs of the purchase are covered, but the remaining funds are deposited into an escrow account. Escrowed funds are released to the contractor during construction through a series of draw requests for completed work. To ensure completion of the job, 10% of each draw is held back; this money is paid after the lender determines their will be no liens on the property.
The Energy Efficient Mortgages Program (EEM) can be used either for the purchase or refinance of your home. The program is designed to finance the cost of adding energy-efficiency features to new or existing housing. Savings is measured by sing the home energy rating system (HERS) or an energy consultant. Up to $200 of the cost of an energy inspection report may be financed through the new mortgage. The improvements can be included in the mortgage if their total cost is less than the total dollar value of the energy that will be saved during their useful life. The cost of the improvements that may be eligible for financing as part of the HUD mortgage is either 5 percent of the property's value, not to exceed $8,000, or $4,000, whichever is greater. An EEM can also be used in conjunction with the FHA Section 203(k) rehabilitation program.
In order to qualify for FHA either of the insured loans described above the borrower must provide full documentation to prove income as a wage earner or a business owner. There is no provision for stating or approximating income. The lender will also require proof of assets in instruments such as checking and savings accounts, stocks, bonds, mutual funds, certain life insurance policies, other investments and qualified retirement plans. A credit report will also be examined to determine how you have managed debt.
The front-end ratio, comprised of the total payment of Principle, Interest, Taxes and (homeowners or hazard) Insurance (Homeowners Association dues when applicable for a condo) is referred to by the acronym PITI. Your PITI may not exceed 29% of the gross income of all borrowers. The back-end ration is comprised of PITI and all recurring monthly debt such as auto, personal, student loans and repayment of credit card and other revolving debt. This may not exceed 41% of the gross income of all borrowers.

I have been doing FHA 203(k) loans since the mid 1990s, and know the program very well. This is an excellent way to buy and rehab a loan with a single closing. Very few lenders are currently doing "K loans" these days either due to the perceived risk or because they simply don't know how.

The basic (very basic) scenario goes like this. Let's say the home is $300,000 and you put $100,000 into it, which equals $400,000. In that situation the only case required for closing (assuming you qualify etc) would be $14,000. The bank would issue "work in place disbursements', meaning you do a chunk of work, then send an inspector to make sure it's done, and they send a check. So, you continually get reimbursed. Since many contractors will demand some up front money to start, it's a good idea to have some extra savings for this. On the other hand, some contractors, knowing the money is literally "in the bank" will wait and use their own credit lines to get started.

A really great features of this loan is that you can finance up to 6 months mortgage payments, meaning you will not be paying rent and your mortgage simultaneously during construction.

Also, you can build in closing costs, "soft costs" like permits, architectural drawings if required etc., as well as a 10 percent reserve contingency for cost overruns.

I would be happy to take a look at your situation. Keep in mind that it usually takes a few extra weeks to close on one of these loans because there are a few more steps involved in the process, so plan accordingly when you make your offer.
Ruth Bonapace
Bank of America Home Loans
201 741 5269
ruthbonapace@gmail.com

Yes, there are ways to purchase a home and do renovations to the property using the FHA 203k program. Depending on the area in which you plan to purchase, there may be some loan amount restrictions, however, this has become a perfect way for purchasers to finance the cost of construction, and close on the home prior to the construction being complete. This makes the sellers and agents very happy, of course, but also gives you the opportunity to upgrade a property, if it fits within the guidelines. There is only one closing, which also reduces your costs.
Please feel free to contact me to go over specific details if you would like further information!