The Difference between Fixer Upper and a Rehab

Posted by Mike Brown Group on Thursday, August 29th, 2013 at 2:50pm.

You might be under the impression that a classic "fixer upper" is also a home that is being rehabilitated. However, that is not exactly the case. In a recent article about "rehabbing a property", the author carefully explained the distinctions between the two.

Essentially,  it boils down to the simple fact that most homes in a condition requiring a true "rehab" will not qualify for a traditional loan. For example, you might find a nice, solid little home that needs a lot of cosmetic work to make it a good place to live. That is a fine example of a home that is a "fixer upper". On the other hand, if that same home had been stripped of all its cabinetry, sheet rock, paneling, and even some doors or windows…it is need of rehabilitation.

The How and Why

Just how and why are such homes on the market? In 2008 we all watched as the whole subprime mortgage nightmare began. This left tens of thousands (some would say well over one million) homes in foreclosure. Banks could not (and still will not) sink much of their available capital into such homes to make them "sellable". Instead, they are often sold "as is" with any and all repairs becoming the responsibility of the new owner.

However, even in the foreclosed state, a home may still have a price tag high enough to require a mortgage. If the home is not in a livable condition, the lender is not going to give the potential owner any financing. After all, it is the physical structure used as the security and when there is no guarantee that the structure is sound or viable it would mean that the lender has nothing assuring the value of the loan.

Enter the FHA 203(k) program. This is meant as a way of financing a rehab because it will give the buyer the funding needed to do the repairs, and to then get the mortgage from the lender.

Getting It Done

The way this works is not what many call "simple" because there is legwork involved. You would partner with an approved consultant or obtain bids for all of the work done. This package is presented to the lender and if a "green light" is given, the work is funded and must be done in six months.

After that, the sum is rolled into the agreed upon mortgage, and the buyer can then take ownership of the home.

Thus, if you have hopes of getting a foreclosed home for a bargain basement price, don't give up just yet. You can indeed get a home with good bones and a solid foundation - even if it is need of a lot of work. You can "rehab" it instead of just becoming a champion fixer upper. There are options; you just have to understand what a lender wants and whether the home you have selected can qualify for rehabilitation.

Works Cited

Ezarik, Melissa. "Buy Home and Rehab it with FHA Loan Financing." 2013. Bank Rate. 2013 <http://www.bankrate.com/finance/mortgages/home-rehab-dream-ruined-try-a-203-k-loan-1.aspx>.

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