How To Finance Properties Needing Significant Repairs

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Securing financing for a property that needs significant work is always a challenge. Any property that needs more than minor repairs will usually fail to meet the requirements of a conventional mortgage. As a result, it is very difficult to obtain financing for such a property. This has the effect of reducing the demand (or supply of buyers) and further depressing the price of homes than need significant work. In fact, this reduction in value is often much greater than the actual cost of repairs. This creates a bargain purchase opportunity for those who are able to make a purchase.

For those who cannot pay cash for a house a convention mortgage is usually the solution. A conventional mortgage is one that conforms to the Fannie Mae guidelines. The borrower can usually finance for 30 years and a low rate (under 5% as of publication). This is great for cash flow, but if the property needs significant repairs a conventional mortgage is not usually possible.

How can you make the purchase without a conventional mortgage?
A construction loan with a local bank is usually the answer. A construction loan is a short-term loan that is used to build a new house, of purchase and repair an existing house. In this case, we want to buy and repair a house. The construction loan will fund the purchase at closing. As the work progresses, the lender will inspect the house and provide draws for you to use to pay the contractors. The duration of the construction loan is typically less than a year and the interest rate is higher than a conventional mortgage (around 7.5% on my last loan).

The drawback to getting the construction loan is that the bank wants is very concerned about your investing experience. They do not want to be stuck with a loan on a property that you cannot manage. For this reason, it may be very difficult for a first-time investor to get a construction. Typical workarounds usually involve hiring a general contractor to oversee the project, but this additional cost frequent take the equity out of the deal.

A solution
The solution is to get pre-approved for a conventional mortgage on a property that does not need repairs. When approaching local lenders for the construction loan you need to bring along this pre-approval letter. Let the local lender know that you intend to refinance to a conventional mortgage once the construction phase is complete. This lets the lender know that the loan will not stay on their books and increase the chances that you will be approved. This approach also lets you get a conventional mortgage, which is good for cash flow, because the repairs are handled before the conventional mortgage comes into play. An added benefit is that the local bank my require you to invest less if they know the loan will not stay on their books.

About the Author:
Don Chambers in an accomplished real estate investor in the Middle Georgia area. He can help you if you are you asking people to: Buy my House Fast. He can help if you are asking: How Do I Invest in Real Estate. His websites are run by rebus Technologies a Full Service IT Consulting Firm.



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