*(See Glossary Of Mortgage Terms Below)

Financing distressed properties in an REO Market

Renovation loans are fast becoming the financing of choice for Real Estate Agents and Asset Managers at some major REO departments and outsourcing firms. A renovation loan allows a homebuyer, owner-occupied or investor to finance a distressed property and close “as-is” on any residential one-to four-unit property in any condition. All of the repairs are indentified and financed into the buyer’s new loan and the home is appraised “as repaired”. Some transactions can even be structured with as low as 3.5 % down payment. If the work is extensive the buyer can finance up to 6 months of their mortgage payments into the loan.

The history of renovation loans

Renovation loans have been around for more than 40 years. The FHA 203(k) loan was designed to revitalize the nations housing stock and communities that experienced blight and functional obsolescence. HUD re-engineered the product in 1994 and introduced the HUD consultant who was the eyes and ears for the lender and HUD. The consultant is typically a licensed contractor with contracting experience. The addition of the HUD consultant streamlined the process and allowed direct – endorsed lenders to close these loans in 30-45 days. The concept of renovation financing was accepted by Fannie & Freddie, so each came out with its version of the FHA 203(k) in the early 1990’s.

The role of the HUD consultant

The consultant’s role is to visit property with the buyers and create a work write-up (WWU). The WWU consists of two parts: the required improvements and the eligible improvements. The HUD consultant inspects all the major systems, including the foundation, roof, plumbing, electrical system, heating, windows, doors, septic and other items that relate to the health, safety and habitability of the home. Once the required improvements are indentified, the buyer can choose other eligible items to add to the WWU. Eligible items are such things as paint, carpet, appliances, kitchen & bathroom remodels, landscaping and other items that would improve and add value to the property.

Future “as-repaired” appraisal

The WWU is given to the appraiser; In essence, it is the appraiser’s rose colored glasses. Although he is visiting a distressed property with a leaking roof, a cracked foundation, broken windows, a kitchen missing cabinets and counters and a bathroom without a toilet, he appraises the house as if it has a new roof, new windows, a new foundation a new kitchen and bathroom.

The FHA 203(k) will lend 110 percent of the future, “as-repaired” value. Fannie and Freddie lend based on 100% of the future, “as-repaired” value.

Increase the buyer pool

The renovation loan opens up a larger buyer pool that can qualify to purchase a distressed property. In the past, whenever the asset manager chose to sell a distressed property “as-is,” the buyer pool was often limited to investors who can pay cash for the property. Such investors typically want a deep discount on the property and most are sold 70 to 80 percent of the list price. With a renovation loan, however a buyer who qualifies for FHA financing can qualify to purchase the very same property and an owner-occupant buyer will pay more for the property than an investor in most cases. A pest inspection and septic system inspection are completed within the first 10 days. Any work required to cure the problems are financed into the buyer’s loan, and the transaction closes before any work is completed on the house. All repairs are done after closing by the buyer’s contractor.

What’s on your buyer’s wish list?

Does your buyer want a house with new paint, new carpet, a remodeled kitchen and dual pane windows?

With a renovation loan your buyer can have all these things in any home you show them. They just need to furnish the Renovation lender a bid from a licensed contractor or from a national home improvement company like Lowes, Home Depot or The Great Indoors and the transaction is closed “As-Is” and the buyer gets the funds after closing to do those improvements and repairs. The buyer needs to qualify for the loan amount including repairs but it is much cheaper than charging their credit cards after they move in. For about $200 a month, a buyer can charge $8,000 in credit cards or finance $30,000 in a renovation loan for those improvements.

Don’t ask the seller for repairs

Some agents make the mistake of requesting the seller to do repairs prior to closing. You should never ask the seller to paint, carpet or do roof repairs prior to closing. The seller has already lost tons of money on that property. They want to minimize their losses and will most likely do the cheap repairs to get the loan off their books. They do not have your buyer’s best interest in mind. Let your buyer choose the contractors to do the work so it gets done the way they want with the colors and quality of materials they want.

The new Streamline FHA 203(k) loan

HUD recently introduced the Streamline FHA 203(k) for non-structural and smaller cosmetic repairs under $35,000. This is available for termite work, paint, carpet, HVAC, roofing, kitchen and bath remodels, plumbing, electrical and more. The main difference is that a HUD consultant is not required and funds are released more liberally to the homeowner after closing.

Written by Skip Schenker

Skip is a licensed Real Estate Broker and was licensed contractor prior to getting into mortgage lending in 1991. He has specialized in 203(k) Renovation loans for 14 years and is the author of the DRE-approved continuing education course, “Sell More Homes With Renovation Loans” Skip can be reached at 714-681-3768


Absentee Landlord – An investment property owner who does not live in the building or take an active part in the normal running of the property. 

Adjustable-Rate Mortgage (ARM) – A mortgage in which the interest rate is adjusted periodically according to a pre-selected index. 

Alternative Financing – A home financing program that accommodates borrowers with special qualifying factors, including poor credit histories. 

Annual Percentage Rate (APR) – A yearly percentage rate that expresses the total finance charge on a loan over its entire term. The APR includes the interest rate, fees, points, and mortgage insurance, and is therefore a more complete measure of a loan’s cost than the interest rate alone. The loan’s interest rate, not its APR, is used to calculate the monthly principal and interest payment. 

Appraisal – A report made by a qualified person setting forth an opinion or estimate of property value. The term also refers to the process by which this estimate is obtained. 

Appreciation/Depreciation – “Appreciation” refers to the increase in a property’s value, except for inflation. A decrease in the value of a property is called “depreciation.” 

Assessed Value – The value that a taxing authority places on real or personal property for the purpose of taxation. 

Automated Underwriting – A computerized method of reviewing home mortgage applications for loan approval. 

Bridge Loan – A form of second deed of trust or mortgage that is collateralized by the borrower’s present home (which is usually for sale) in a manner that allows the proceeds to be used for closing on a new house before the present home is sold. 

Broker – An individual employed on a fee or commission basis as a real estate agent to bring buyers and sellers together and assist in negotiating contracts between them for the sale of residential real estate. 

Buyer’s Broker – Most real estate brokers and agents work only for the sellers. A buyer’s broker serves the interest of the buyer and has no relationship with the seller. 

Capital Gains – Used for tax purposes, this is the capital gain you make when you sell your home. For example, if you purchase a property for $100,000 and sell it some years later for $150,000, your capital gain is $50,000. 

Closing – The consummation of a real estate transaction. The closing includes the delivery of a deed, financial adjustments, the signing of notes, and the disbursement of funds necessary to complete the sale and loan transaction. 

Closing Agent – Usually an attorney or title agency representative who oversees the closing and witnesses the signing of the closing documents. 

Closing Costs – The costs paid by the mortgage borrower (and sometimes the seller) in addition to the purchase price of the property. These include the origination fee, discount points, appraisal, credit report, title insurance, attorney’s fees, survey, and prepaid items such as tax and insurance escrow payments. 

Commission – Compensation for negotiating a real estate or loan transaction, often expressed as a percentage of the selling price or loan amount. 

Commitment Letter – A formal offer by a lender stating the terms under which it agrees to loan money to a homebuyer. 

Comparable Market Analysis (CMA) – A written analysis of houses having similar characteristics currently being offered for sale as well as comparable houses sold in the past six months. This enables you to determine if you are paying market value for a home, and to identify whether market prices are rising or falling. 

HUD-1 Settlement Statement – A standard form used to disclose costs at closing. 

Index – A published interest rate, such as the prime rate, LIBOR, T-Bill rate, or the 11th District COFI. Lenders use indexes to establish interest rates charged on mortgages or to compare investment returns. On ARMs, a predetermined margin is added to the index to compute the interest rate adjustment. 

Interest Rate – The percentage of an amount of money which is paid for its use for a specified time. 

Interim Interest – The interest that accrues, on a per-diem basis, from the day of closing until the end of the month. 

Investment Property – Real estate owned with the intent of supplementing income and not intended for owner occupancy. 

Leverage – Using credit or borrowed money to increase the rate of return from an investment. For example, by purchasing a $100,000 home with 10% down, you are using just $10,000 to control the investment. 

Lien – A legal claim or attachment against property as security for payment of an obligation. 

Loan Conditions – These are terms under which the lender agrees to make the loan. They include the interest rate, length of loan agreement, and any requirements the borrower must meet prior to closing. 

Loan Payment Reserves – A requirement of many loan programs that, in addition to funds for the down payment and other purchase-related costs, you have saved enough money to cover one or two months of mortgage payments after your closing. 

Loan Settlement – The conclusion of the mortgage transaction. This includes the delivery of a deed, the signing of notes, and the disbursement of funds necessary to the mortgage loan transaction. 

Loan-To-Value (LTV) – The ratio between the amount of a given mortgage loan and the lower of sales price or appraised value. 

Margin – The set percentage the lender adds to the index rate to determine the interest rate of an ARM. 

Mortgage – The conveyance of an interest in real property given as security for the payment of a loan. 

Mortgage Insurance (MI) – See Private Mortgage Insurance (PMI). 

Mortgagee – The lender on a mortgage transaction. 

Mortgagor – The borrower in a mortgage transaction who pledges property as security for a debt. 

Multiple Listing Service – A computer-based service for real estate agents that provides descriptions of most of the houses listed for sale in an area. 

Nonconforming Loan – Conventional home mortgages not eligible for sale and delivery to either FNMA or FHLMC because of various reasons, including loan amount, loan characteristics or underwriting guidelines. 

Note – A general term for any kind of paper or document signed by a borrower that is an acknowledgment of the debt, and is, by inference, a promise to pay. When the note is secured by a mortgage, it is called a mortgage note and the mortgagee (lender) is named as the payee. 

Origination Fee – The amount charged for services performed by the company handling the initial application and processing of the loan. 

Points – A one-time charge by the lender to increase the yield of the loan; a point is 1% of the amount of the mortgage. 

Preapproval – A written commitment from a lender, subject to a property appraisal and other stated conditions, that lets you know exactly how much home you can purchase. 

Prepaids – Closing costs related to the mortgage loan which are collected at or before loan closing – including per diem prepaid interest and initial deposits of monthly escrows of taxes and insurance. 

Primary Residence – A residence which the borrower intends to occupy as the principal residence. 

Principal – The amount borrowed or remaining unpaid; also, that part of the monthly payment that reduces the outstanding balance of a mortgage. 

Private Mortgage Insurance (PMI) – Insurance written by a private company protecting the mortgage lender against loss resulting from a mortgage default. 

Processing – The preparation of a mortgage loan application and supporting documentation for consideration by a lender or insurer. 

Property Manager – Person or company that takes over the repair and maintenance of a property for `a percentage of the gross income. Services may also include collecting rents and leasing the property. 

Rate Cap – The limit of how much the interest rate may change on an ARM at each adjustment and `over the life of the loan. 

Rate Lock – The borrower and the lender agree to protect the interest rates, points, and term of the `loan while it is processed 

Real Estate Agent – A salesperson, usually licensed by the state, and supervised by a broker. Agents `work solely on commissions earned by selling properties. 

REALTOR® – Person licensed to sell or lease real property acting as an agent for others and who is a member of a local real estate board affiliated with the National Association of Realtors.® 

Rental Agent – A real estate agent who specializes in working with renters to locate potential properties for lease. 

Return On Investment – The percentage of capital gain that you make on an investment. For example, say you invest $1,000 into a property, and a year later it is worth $1,500. Your return on investment equals the profit ($500) divided by the initial investment ($1,000) or 50%. 

Termination – Notice from the landlord that the lease has been terminated and the tenant must move out by a certain date. 

Title Insurance – An insurance policy that protects a lender and/or homebuyer (only if homebuyer purchases a separate policy, called owner’s coverage) against any loss resulting from a title error or dispute. 

 Truth-In-Lending Statement – A full disclosure of credit terms using a standard format required by Federal law. This is intended to facilitate comparisons between the lending terms and financial institutions. 

Underwriting – Analysis of risk, determination of loan eligibility, and setting of an appropriate rate and terms for a mortgage on a given property for given borrowers. 

VA Funding Fee – The amount charged on VA mortgages to cover administrative costs


One response

28 12 2010
Kristeen Smith


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