Buy with Little or Nothing Down

Down payment requirements for 203(k) loans generally match the same rules that apply to FHA 203(b) mortgages; however, the 203(k) plan gives first-time buyers a pure no-down-payment possibility. Here's how this works.

You locate a house that shows promise. The house can be bought for, say, $180,000; after rehab, its market value appraisal will increase to $240,000. Next, you or your Realtor could locate an investor or contractor who will buy the house and take responsibility for the improvements. If this investor or contractor will pledge to sell the rehabbed home to a qualified first-time buyer, FHA will loan approximately $230,000 against this property. Upon completion of repairs, you then buy the property from the investor and assume the $230,000 FHA 203(k) mortgage. FHA calls this first-time buyer plan Escrow Commitment Procedure.

You achieve a no-down-payment purchase. The investor or contractor gains because he or she has paid $180,000 for the house plus, say, $17,500 for the value-creating improvements—a total investment of $197,500. That leaves a profit for the investor of $32,500. Of course, the exact numbers vary according to each property, but the process remains the same.

Some investors, in fact, enter the FHA 203(k) program and locate properties on their own for repair and resale to first-time buyers. "Investors love the program," says Jackie Carlisle of Malone Mortgage in Oakland, California. "Most of them can do their own work and get paid for it. It's the best game in town for rehab money."

Of course, if you do buy from an investor, he or she is the person who will profit from the rehab work, not you. Make this choice for only two reasons: You can't come up with the small cash-to-close that FHA requires; or you want a freshly renovated property, but can't take the time or risk to perform (or arrange) the work yourself.

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