Your question is a very good one and I will be happy to answer it for you... A heads up, I address several topics in this response, some from the original post, others that came up during the thread, I apologize in advance.
First off, the loan program you were referring to above is a 203K, a FHA Rehab loan for buyers intending on living in the property. Almost any improvement can be made to the home (either as a refinance or a purchase). As you said, for people with little capital, this is a FANTASTIC program for them. This program can be used on homes that don't have any deficiencies or homes that need a gut rehab.
Before I get ahead of myself, I want to make sure everyone knows that due to the Housing and Recovery Act of 2008, certain down payment programs are now NOT eligible to be used as down payment funds in conjunction with FHA. Each program is differentt but keep in mind that just because a program offers down payment assistance, does NOT guarantee those funds can be used. I've ran into this twice in the past week myself but fortunately I knew to look for it or I'd have found out on the home stretch that the deal was dead. In each instance, we were able to restructure the deal in time but this could have easily been a disaster, please make sure your lending partners are paying attention. Gifts from family members are still allowed and certain state/local programs can be used as down payment funds.
Continuing... How does a Renovation loan help the Real Estate Professional in todays market?
It allows you to sell a property based on it's potential without putting your own funds into it. Lets be honest, there are a lot of people out there hurting for money and it seems silly to put your own funds into a transaction that may be stuck there for many months when the buyer will go and fix it up however they want anyway. As a selling agent, you can take your buyer to homes that are in need of some TLC and they can decide what upgrades they want. When was the last time they got to choose the upgrades they wanted in their home? Regardless of which side of the transaction you're on, your client will have greater exposure than without.
My company actually has a version investors can use as well but I digress, contact me if you want more info on that product.
Someone mentioned 100% financing, yes, this is a USDA loan. It allows you to finance up to 100% of the cost of your loan, INCLUDING closing costs (of course the home has to appraise out).
To determine if you are in an area where USDA funding can be used, please visit the website immediately below. Click on the link on the left under property eligibility and select the applicable property type and select your county. The map will allow you to zoom in pretty far to determine if you/the property is in the a USDA financing area.
If you feel this post was helpful, please vote accordingly.
P.S. Below are two other posts I've done related to 203K financing and how it works.
Full disclosure: I'm a Renovation Specialist with Wells Fargo and I'm licensed to lend in every state.... more