A rehab Loan Might be What You Need, Or Is It
The 203k loan allows you to buy and fix up a property all in one transaction. This allows you to get a loan for above what the property is currently worth, in the form of a 1st and 2nd. Which is nice if you find a house that’s in poor condition and just needs cosmetic repairs or a little upgrading. And a “Streamline 203k” can give you a maximum up to $35,000, which would be for a major repair project. There is a small catch, though.
The problem is, all the work is required to be done by a licensed contractor, which eats at your equity position in the property. Most people can at least paint, clean, and do some minor repairs, change wall plates, etc. The contractor has a certain time limit where the repairs have to be completed, usually before closing on the property. If you can get a loan for the house in its’ as-is condition. Make sure to demand that you don’t have a prepayment penalty on the loan. Take the next six to twelve months to fix the place up where the property will appraise for a higher price. Then refinance the house under a new loan. Which you’ll have to weigh-and-decide if the amount it will cost for the refinance is worth performing. It shouldn’t be more than 5%-6% of the value of the property, which they should be able to fold into the new loan. There won’t be any out-of-pocket expense. Once you refinance, your loan payment should go down and you should have a larger equity position in that house at the same time. With the current low interest rates, it might better not to even perform the refinance, it will all depend on your current situation.
Example: A $200,000 house value after fix-up. You buy the house for $150,000. It needs per contractor estimates around $30,000 in repairs. After the repairs are complete, you have a $20,000 equity position adding in what you put down on the original loan. But if you are half way handy and can operate a paint brush and roller, use a caulk gun, and know how to clean a house, you could lower that estimate by $10,000 or so. If the repairs are minor, many people can do those repairs themselves and save thousands of dollars. Always check with your local city for the required permits before starting any repair project.
In conclusion: If you can’t do the repairs or don’t have the money or time to do those repairs, then the 203k is for you. But, if you have the cash to do the fix up, and the down payment for your new house, and you are capable of doing some minor repairs, you’ll be in a better equity position down the road. And if you refinanced the house the payments might be substantially lower. You could even rent the house out for more than you’re paying on the mortgage at that point, which would still give you a tax shelter and passive income for the future. Of course, this is if you decided to move some time in the future. Try to stay in the property for at least 24 months, this way, you won’t have to pay the capital gains tax, which at one time was 42%!
Robert Lett
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Cheyenne, WY 82001
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