FHA program funds fixers

Investors have been taking advantage of low interest rates and discounted prices to buy run-down foreclosure properties, sometimes 10 or so at a time. They fix up the properties enough to be rented until the market turns, which could take years. When the time is right, the investor puts the finishing touches on the improvements and hopefully sells for a profit.

This can be a risky strategy for an inexperienced homebuyer. It's hard to compete with investors who make all-cash offers. Investors usually have a team of contractors who can do the fix-up work. If they're working on several properties at once within close proximity of one another, it's more economical than fixing up one property at a time.

Financing the improvements to fix up a property in today's market is difficult. Construction financing is virtually nonexistent. Most conventional financing requires a 20 percent cash downpayment. Before the subprime mortgage meltdown, fixer buyers often used a home equity line of credit (HELOC) to finance improvements.

Today, you would need to have enough equity in the property to tap this kind of money. For instance, if you made a downpayment equal to 50 percent of the market value, you might be able to find a lender that would give you a HELOC for up to 30 percent of the value.

HOUSE HUNTING TIP: Another option that doesn't require a huge outlay of cash is to use the FHA 203K mortgage program that is designed specifically to provide financing for repairs and renovations to single-family residences. It is available only to owner-occupants, not investors. The maximum mortgage amount varies with location. It's currently $729,750 in high-cost areas like the San Francisco Bay Area.

The program works like this: Suppose you buy an $800,000 home using your savings for the cash downpayment and a $729,750 loan from FHA. FHA 203K loans are available with as little at 3 to 5 percent cash down, plus some cash reserves to pay contractors' initial payments. The interest rate is a little higher than it is on a standard FHA loan. ...CONTINUED

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