Foreclosures have special set of rules
Q: I’ve been looking for houses and I want to buy a foreclosure. The problem is, I’m getting a mortgage, and my lender and realtor tell me the house has to meet certain criteria to pass an appraisal. The houses I’ve seen aren’t that bad. One of them just needs flooring and cabinets. What’s the big deal? Why can’t I just get financing now and put the stuff it needs in later?
A: I know it’s incredibly tempting to get a foreclosure because the value is usually so good. It’s especially tempting if you’re not afraid of a little work.
But there are some quirks to foreclosures that must be kept in mind to be successful. One of the major ones is making sure your financing will actually allow for the condition of the property. Essentially, according to Christine Turpen at First Mortgage in Albuquerque, no one wants to lend money on “substandard” housing.
What constitutes “substandard” housing? Well, in part, flooring and cabinets. In other words, if something was supposed to be there and it’s not, it’s considered substandard. So, if the house has a modern kitchen with shelving and no cabinets, fine. But if there are big rectangles on the walls where cabinets used to be, that’s a problem.
The same goes for the floors: if they are nicely finished cement and are sealed properly, great. If it’s obvious there was carpet or other flooring in there and now it’s gone, that’s considered substandard in the eyes of most lenders.
Also, the appraiser will be checking for any hazardous conditions, and checking if systems such as the heating, roof, electrical and plumbing aren’t working or seem to be on the verge of failing. In other words, you should be able to move into the house as is and start living.
But there are alternatives. There’s a conventional construction loan, as well as an underused loan offered by the Federal Housing Administration, or FHA, called the 203K loan. Not all lenders do these, so ask your current lender if they’re familiar with them and figure out what might work for you.
Both programs allow you to buy a house, and make renovations and repairs to it. The requirements vary depending on which loan you choose, but they both provide you the opportunity to get a foreclosure. The downside is you will have to finance the amount needed for the repairs or renovations and your down payment will increase as the total cost of the house increases.
Whichever way you decide to go, remember, foreclosures that are in need of the basics to be habitable require either cash or a construction loan of some kind. Make sure you’re being honest with yourself as you look at houses so you have a chance of getting the house you want, and aren’t just wasting time and money on a house you can’t have.
It’s still a great time to buy, and I would like to see you get something great while prices are still reasonable and interest rates are still low.