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5 Crucial Questions to Ask Before You Flip Your First House

October 30, 2019

AleksandarNakic/iStock

Thanks to the seemingly endless glut of home improvement TV shows like “Flip or Flop,” “Masters of Flip,” and “Rehab Addict,” it seems like flipping houses has become America’s favorite pastime.

But for the inexperienced, house flipping can be a dangerous and costly game. Make one wrong move, and that “great investment” can turn into a monumental mistake.

Don’t want your first flip to be a flop? Here are five questions you might never think to ask yourself, but totally should, before you begin flipping houses.

1. Do I have a great house flipping team?

Buying and flipping a house isn’t a one-person job; it’s a team sport, and you need to surround yourself with the right players. This starts with having a savvy real estate agent who can help you not only find a great investment opportunity but also negotiate a great deal on the property. Buy low, and things are already looking up!

You also need home improvement professionals who can guide you through the remodeling process and help you set a budget, determine what renovations to make (some yield a better return on investment than others), and solve any issues that crop up during construction.

Typically, you want to hire a general contractor, a person who’s responsible for providing all of the laborers, building materials, and equipment necessary for the entire project.

2. How long will it take to flip this house?

Ideally, you want to buy a house that can be renovated within four to six weeks, says Bobby Curtis, a real estate broker at Living Room Realty in Portland, OR.

A short turnaround time will help you keep costs like interest and taxes to a minimum.

On average, homes take about 180 days to flip, according to ATTOM Data Solutions, curator of a nationwide property database. But flipping a house can take a lot longer. After all, there’s no telling what you’ll find when you start tearing down walls.

Mold could be lurking behind drywall in a basement, or there could be electrical issues beneath the surface, warns J.B. Sassano, president of Mr. Handyman, a national home improvement company based in Ann Arbor, MI.

Also, depending on the housing market, it may take you a while to find a buyer once the home is fixed up.

The moral of the story: Patience is more than just a virtue for house flippers—it’s a requirement.

3. Am I putting too much at risk?

Although there are a number of loan options for house flipping, many first-time house flippers stretch themselves too thin when it comes to how much of their money they invest in a project. Some even put their entire retirement savings or child’s college fund on the line. Not a great idea!

It’s important to truly assess your risk tolerance. Depending on where you are financially, you may or may not be a good candidate for flipping houses right now.

4. Can I think like an investor instead of a homeowner?

When flipping houses, you have to keep future home buyers in mind. While it may be tempting, the last thing you want to do is make home improvements and design decisions that reflect your personal tastes instead of what most home buyers want.

Be prepared to choose home features and housing materials that are classic and offer wide appeal. If you can’t commit to doing that, flipping houses isn’t the right endeavor for you.

5. Do I understand my loan options?

Unless you have a ton of cash readily available, you’ll need to borrow money to buy and renovate a distressed property. But obtaining a loan for a house flip isn’t like getting a conventional loan for a home you intend to actually live in.

Most house flippers use a “fix-and-flip loan” that’s specifically designed for purchasing and remodeling homes. There are five types of fix-and-flip loans, and each comes with its own set of qualification requirements and pros and cons.

Hard-money loan: Sometimes called “rehab loans,” these are short-term loans intended for real estate investments. These loans are usually much shorter than traditional mortgages. Six months to one year is most common, but hard-money loans can go up to five years. Moreover, interest rates are considerably higher, typically ranging from 12% to 21%, and most hard-money lenders also charge 3 to 6 points upfront, where 1 point equals 1% of the loan.

There’s also a limit on how much you can borrow. Typically, hard-money loan lenders allow you to borrow about 60% to 75% of the property value you intend to purchase. So, if you’re looking at a $200,000 property, for example, the most you’ll probably be allowed to borrow would be $150,000, meaning you’d have to pay $50,000 upfront.

Cash-out refinance: If the value of your primary residence has increased, one financing option for your flip is a cash-out refinance. This lets you tap the equity in your home by refinancing your mortgage for more than you currently owe and taking the difference in cash. Your new loan will be the amount you still owe on your mortgage, plus the cash you wanted to take out.

So, say you had a $300,000 loan, on which you still owed $200,000. That would mean you had $100,000 in equity in your house. You could cash out $25,000 of that equity, and get a new mortgage for $225,000, to replace your existing $200,000 loan—and then put that $25,000 toward your house flip.

The drawbacks? You’ll have to pay closing costs—which average about 3% to 6% of the total loan—and if you’re refinancing to a higher mortgage rate, you could wind up paying more money in interest on your loan over the long run.

Home equity loan or line of credit: Both a home equity loan or home equity line of credit are financing options that let you borrow money using the equity in your home as collateral.

The big difference: a home equity loan provides you with the cash upfront, and you pay monthly installments over the length of the loan (like you do on your first mortgage). With a HELOC, you access the money in small chunks over the life of the loan.

Investment line of credit: Also called an “acquisition line of credit,” an investment line of credit is similar to an HELOC—except it’s issued solely for buying investment properties.

This short-term financing option—with loans generally lasting from about 18 to 24 months—lets you borrow cash as needed, up to a predetermined loan limit. These loans are best suited for people who have experience flipping houses, since borrowers are underwritten and approved based on their demonstrated record of owning or flipping investment properties, and their financial wherewithal.

Crowdfunding: When using crowdfunding, or “peer-to-peer lending,” the funds are raised through the contributions of a large number of people, usually through the internet.

For instance, RealtyShares, a San Francisco–based company that finances investment properties in 35 states, gives house flippers access to more than 38,000 high net worth individuals who invest in a specific transaction for as little as $5,000. RealtyShares funds up to 70% of the estimated after-repair value of a property in as little as 10 days. Interest rates vary from 8% to 11%, with the average loan term on luxury flips being 12 months.

The post 5 Crucial Questions to Ask Before You Flip Your First House appeared first on Real Estate News & Insights | realtor.com®.

5 Crucial Questions to Ask Before You Buy a Fixer-Upper

September 18, 2019

iStock; realtor.com

Thinking about buying a fixer-upper? Join the club. Blame it on the popularity of renovation reality TV or just the fact that people are searching for deals, but many home buyers are willing to purchase a property in need of major repairs. One survey by Clever Real Estate found that 67% of millennial home shoppers in the United States said they would put in an offer on a home with serious flaws that need to be fixed.

Purchasing a home that needs serious remodeling, though, isn’t a decision you should make lightly. Here are five questions to ask yourself before buying a fixer-upper.

1. What’s my motivation?

Reviving a rundown home is always a challenge, no matter how many houses you’ve flipped or episodes of “Fixer Upper” you’ve seen—and that’s why it’s important to assess your motivations before you dive in, says Joshua Jarvis, founder of Jarvis Team Realty in Duluth, GA.

Simply enamored by what you’ve seen on HGTV? Newsflash: “Reality TV is not reality,” says Jarvis. “I hate to shatter people’s dreams, but there’s a lot more work involved than people think.”

Flipping an outdated house in order to make a profit, though, is a sound reason to buy a fixer-upper, Jarvis says. After all, home flips in 2018 returned an average gross profit of $65,000, according to ATTOM Data Solutions.

Purchasing a fixer-upper can also be a good idea if you’re looking to make a home your own without building one from scratch, or if you’re simply looking for a great deal. Indeed, people shopping for a fixer-upper can expect to spend 20% to 25% less than what they’d have to shell out for comparable homes that are move-in ready, says Dan Bawden of the National Association of Homebuilders. (Homes with serious issues—such as cracks in the foundation or a major mold infestation—can command even deeper discounts, Bawden says.)

Fixer-uppers are also good options for DIY buffs—your sweat equity will buy you bragging rights. What’s sweeter than being complimented on your kitchen and being able to say, “Thanks, I did it myself”?

2. Where am I going to live during the renovations?

Unless you’re planning to live in your new home while the renovations are underway, you’re going to need a place to stay until the house is ready. This can be a financial challenge, Bawden notes, since you have to factor in the time you’ll be paying the mortgage and bills without being able to live in the home. Read: Six months of paying rent on top of your house payment can quickly eat into what you saved on your “great deal.”

3. What’s my remodeling budget?

The best fixer-uppers are ones that mostly need cosmetic updates—things like kitchen and bathroom renovations, new floors, siding repair, or wallpaper removal—since major flaws can quickly eat up your remodeling budget. But, regardless of how much (or how little) work you’re going to put in, you need to have enough money to pay for the renovations.

Need help setting a budget? Have several contractors give you in-person estimates. That way you’ll have a rough but accurate idea of how much it’s all going to cost you. The caveat: You may have to pay the professional a few hundred dollars to walk through a potential home and estimate the renovation costs, but it’s worth it.

4. How am I going to pay for everything?

Now that you know how much the renovations are going to cost, you have to figure out how you’re going to pay for everything. Unless you’re sitting on a mountain of cold, hard cash, you’ll need to obtain a home loan that allows you to spend a portion of money on home improvements. The good news: A home that requires major renovations can qualify for a special type of financing called a home improvement loan. There are two main types of home improvement loans.

The first is a FHA 203(k). This is a loan from the Federal Housing Administration that lets you put as little as 3.5% down. There are a couple of restrictions, though. The original foundation must remain, says Suzanne Caldeira, vice president at mortgage lending company Shamrock Financial Corp. Also, the upgrades you make cannot be “luxury” items, like adding a pool or fire pit. Third, the work must be completed within six months.

To qualify for a 203(k) loan, homeowners have to provide a bid from an approved contractor to make the upgrades they want with their loan paperwork. An appraiser reviews the home and the submitted bid, and appraises the estimated value of the home post-renovation. Once the loan is approved, the money for the renovation is put into escrow. After the work is completed—the deadline is six months—an inspector visits to determine that it’s been done correctly, and then the money is released to the contractor. In the same way as with traditional FHA loans, you can pay the money back over 15 or 30 years.

The second type of home improvement loan is a Fannie Mae HomeStyle loan. It’s similar to a 203(k) loan, but it requires a down payment of at least 5%. Another difference: There’s no limit to the kinds of renovations you can do, as long as everything is permanently affixed to the home and adds value.

Like a 203(k) loan borrower, you will need to hire an approved contractor and submit a bid for the project with your loan paperwork. You then have an appraiser determine what your home will be worth after the renovations. Once you’ve got that number, you can borrow up to 50% of that appraised value to work on the renovation. As with a 203(k) loan, the money for the renovation is held in escrow until the work is completed and inspected and is then released to the contractor. However, with the HomeStyle loan, you get 12 months to complete the renovation, instead of six. You then pay it back over a period of 15 to 30 years at either a fixed or adjustable rate.

5. Am I prepared to manage this project?

From finding the right house and negotiating a deal, to hiring contractors and securing permits, there will without a doubt be plenty of moving parts for you to oversee during this whole process. That will mean you need to ask yourself whether you have the time and the patience to manage everything.

While hiring a general contractor to oversee the renovations can help lighten the load, reviving a fixer-upper is still a huge commitment, so make sure you know what’s required before you dive in.

The post 5 Crucial Questions to Ask Before You Buy a Fixer-Upper appeared first on Real Estate News & Insights | realtor.com®.

Want to Buy a Cheap House? Watch Out! Why My $36K ‘Bargain’ Home Was Anything But

September 16, 2019

DarrenTownsend/iStock

As a real estate agent for the past five years, I’ve heard many of my clients tell me how badly they want to find a real deal. Take, for instance, my client Linda, who recently left me an urgent message about a house in Auburn, WA, for sale for only $125,000.

Given that homes in this Seattle suburb were going for three times that much, this had to be the bargain of the century, right?

Alas, no. Allow me to explain.

Why ‘cheap’ houses often end up being anything but

A few hours later, I met Linda and her husband at the house. The yard was overgrown, so someone had hacked a path through the blackberry bushes and brush to the entrance. I unlocked the door, and it creaked open. Brave real estate agent that I am, I let my clients go in first.

Fixer upper entry
First impressions of fixer-upper house

NWMLS

It’s normally good etiquette when touring a home to take your shoes off at the front door. That wasn’t an option here. The floors were years past their due date for being replaced, and covered with crumbles from the disintegrating walls and ceiling. The house had obviously not been lived in for some time, and the electricity was turned off. From what we could see in the dark, the floor plan was cramped and outdated.

I’d seen bigger kitchens in an RV.

Fixer upper kitchen
There’s nothing salvageable in this kitchen.

NWMLS

Yet my clients were not deterred by this shell of a house, or the so-so neighborhood. They were still excited by the $125,000 price tag.

I warned them that the house could end up selling for more than that. As we walked around outside, more people came to look at the house, so we knew we had competition.

As it turned out, the house sold for $315,000—over twice the list price, and in my opinion, far too much.

And even then, Linda and her husband were still determined to find a bargain, so I showed them several more houses and lots, all in the bottom price range of the current market. Problem is, homes in this bottom price range typically had three things wrong with them: They were so rundown they weren’t habitable, they weren’t in a great neighborhood, yet they inspired competition, so that typically, they ended up selling for twice the listing price.

In the end, I never found Linda and her husband that bargain house they were hoping for.

Fixer living room
Sagging ceiling fans and holes in the ceiling can mean water problems.

NWMLS

The downsides of distressed properties

Linda is hardly alone in her desire for a deal. My husband and I have done our own share of deal hunting—and, once, even bought a 100-year-old house in Peru, IN, for $36,000.

Granted, this was back in 1985, but the house was in sorry shape. One corner of the house had to be jacked up because it was sinking. The electrical systems were so old, my husband—a construction professional—said we were lucky the wiring hadn’t burned the place down.

Yet we were young and energetic, so we rolled up our sleeves and made changes—even many that weren’t strictly necessary, such as moving the garage to create a backyard. We also hated the dark, small kitchen, so we enlarged it onto the once-decrepit sun porch.

All told, we spent three years and about $20,000 fixing up the house. When we sold it for $55,000, we didn’t even make a profit!

Working nights
There weren’t enough daylight hours to get this project done.

Sally Herigstad

And that’s hardly the only bargain basement fixer-upper we’ve entertained tackling, either. We’ve seen houses that have been ravaged by fire, or where the wiring has been ripped out of walls, or where people have started remodeling but have given up halfway through. We once even bought a house with serious roof and water damage that apparently had been used as a marijuana grow house. It was a steal at $175,000, but it took us three years and over $120,000 to fix up and sell, not counting our considerable labor.

Fixed up home in Peru
After three years, our Indiana house looked good … but was it worth it?

Sally Herigstad

What to know before you buy a house at a bargain price

It is tempting when you see distressed properties at low, low prices, but my husband swears he will never buy a fixer-upper ever again. And I have to say I agree.

The biggest problem with a house at a rock-bottom price is that all you are about to invest in time and money could probably be better spent elsewhere. If you spend months or years (and tens of thousands of dollars) working on a dumpy 1952 house in an iffy neighborhood, what do you have when you’re done? Probably an over-improved but still slightly dumpy 1952 house in an iffy neighborhood. If, instead, you’d spent that time and money on a higher-quality home in a well cared for neighborhood, you’d have far more potential upside for your investment.

Another factor to consider is how you intend to make a profit on your real estate investment. Is it by improving and reselling the house? Or is most of your profit actually going to be from a general market uptrend?

For example, although we eventually made a profit fixing up and selling our former marijuana grow house, we probably cleared more of a net profit because the real estate market improved during the three years we owned it, rather than because of the improvements we made. It would have been a whole lot easier simply to buy a house in good condition and hold it for the same period of time, then just kick back and watch as the market went up.

All this doesn’t mean you shouldn’t shop for a good deal. It’s just that when you see one, estimate how much it will cost you to fix any deficiencies (and just assume that it always costs more than you think). Don’t forget the substantial costs of purchasing, financing, and selling property. If the numbers work out and you think you can make a profit, you might be looking at a good investment.

But if, on the other hand, the numbers don’t add up, perhaps that low, low price still isn’t low enough.

The post Want to Buy a Cheap House? Watch Out! Why My $36K ‘Bargain’ Home Was Anything But appeared first on Real Estate News & Insights | realtor.com®.

I Fell in Love With a Fixer-Upper: A Tale of Romance Gone Horribly Wrong

June 7, 2019
Sally Herigstad

The real estate listing read like a warning sign: “Pardon big mess. TLC required.”

Still, I could see in the pictures that there was something special about this house—a massive brick Georgian lounging on 11 acres with an in-ground swimming pool to boot. How could I resist?

As a real estate agent in Enumclaw, WA, I always tell people the first rule is never to fall in love with a house before it’s yours—especially if it’s a fixer-upper. But I broke my own rule. In fact, I was head over heels before I’d even seen this rundown house in person—so much so that I made an offer on it that same day, based on the photos alone.

Big fixer house
It’s overgrown and neglected, but oh my!

Sally Herigstad

What it’s really like to buy a fixer-upper

Since I was on vacation in Hawaii at the time, I called my friends Buzz and Suzie and asked them to go take a look. Buzz thought it had potential, despite a long crack in the travertine tiles in the kitchen. Suzie was decidedly less impressed. She said the house was cold, dark, and “smelled funny.”

After requesting more photos of the property, I could understand Suzie’s concerns. There was trash piled in every room. The house had been empty for at least three years, and the owners had left a lot behind. Thieves had taken anything loose of value and tossed the rest around. Someone had tried to make off with the six-burner Dacor oven, but it was so big they only made it as far as the dining room, where they left it up on end. Mice and other varmints had had the run of the place, and left evidence of their habitation everywhere.

House that needs work
It will take more than landscaping to get this house in shape.

Sally Herigstad

Outside, weeds had grown so high they reached the second-story windows. In the backyard, construction leftovers and equipment had been left in piles so big, you could see them in satellite images I pulled up on Google Maps.

The price: $560,000. Which seems like a whole lot for a rundown house, but it was a huge piece of property, within commuting distance of Seattle. Plus, the price had just dropped by a hundred grand. Some house-flipper was bound to snap this place up.

Maybe it’s because I couldn’t smell the house from Hawaii, or maybe I was already too much in love. Whatever the reason, my husband and I made a full-priced offer on the house that day—and not a moment too soon. The sellers received multiple offers, including one for the same price. They said we could have it if we agreed to remove all trash ourselves and pay the $800 overdue water bill.

We wholeheartedly agreed to the terms.

The risks of a fixer-upper, revealed

Even after our offer was accepted, closing the deal wasn’t easy. The house was a short sale, which left no room to negotiate for repairs. At one point during negotiations, the high-end washer and dryer within the house disappeared. With a normal sale, we could have insisted on replacements, because the appliances were listed in the purchase agreement. But we were out of luck.

Fixer laundry room as is
Who took the fancy washer and dryer?

Sally Herigstad

We had the house inspected, and thankfully, that report came back without any major flaws, so we sallied forth and finally got our hands on the keys to our castle.

That’s when we got a better look at what we’d gotten ourselves into.

As we walked through the house as new owners, we made a mental list of all the repairs and replacements that needed to be done to make the place habitable, let alone bring it back to its prior glory. The list kept growing as we went from room to room. For instance, here was a nice bathroom, but who took the mirror and linen cupboard?

As-is fixer missing items
Someone even took the mirror and cabinet.

Sally Herigstad

Right about now, you might think that my husband, who works in construction and was responsible for doing all the major repairs, would be asking me what I’d gotten him into. On the contrary, he was busy admiring what was good about it. The house wasn’t old—it was built in 2001. The windows and walls were in good shape, and the trim and wainscoting were beautiful. For every missing or ruined appliance (who steals the inside of a range hood?) we found something else that was in good shape, or even a bonus, like the steam shower.

While my husband set to work getting utilities hooked up and the heater going, my mom and daughter-in-law spent four days tossing trash and scrubbing rodent droppings out of every sink, tub, and cupboard. We filled the pickup with loads for the dump and the local thrift shop, which accepted piles of clothes, toys, and knickknacks that had been strewn throughout the house. We convinced the sellers to send someone for the two dead cars buried in blackberry bushes in the front yard.

One month after closing, the house was clean enough, and smelling good enough, for us to move in.

But still, there were surprises.

After I cleaned the guest room tub, my husband wondered why there was water in the crawl space underneath. It turns out the drain for the tub was never hooked up, so when I rinsed the tub, the water went everywhere. After I mowed the backyard, I kept feeling strange lumps and hearing crackling noises as I walked. Pulling back matted grass, I found plastic milk cartons, basketballs, and an unopened jar of pickles. Every time I thought I had all the trash out of the backyard, I found another trove.

I paid someone to clean the flowerbeds. I’d check on him and say, “What did you find today?” He’d say, “Not much. Just a cellphone, some plastic bags, and one slipper, this time.”

Fixer upper backyard
We can’t even see what’s going on in most of the backyard.

Sally Herigstad

Would I ever buy a fixer-upper again?

Six years later, I can’t say we’ve completely restored the house to its former glory. No house is ever “done,” in my experience. Still, I’m glad we bought it. Not only was it a great investment, but we’ve had room here for many memorable family reunions, pool parties, and barbecues. We’ve raised sheep and chickens, and delighted in living in the country. And when we do sell the house, as we expect to later this year, we’ll walk away with a profit.

If we’d been turned off by a dirty house that smelled funny, we’d have never bought the house we now love.

Back porch before and after
Now that we’ve removed the tree on top of it, the porch is looking better!

Sally Herigstad

That doesn’t mean you should ignore all warning signs when you look at a house, however. Here are a few problems you might find—and when you should and shouldn’t overlook them:

Smells

Cooking smells, musty odors, cigarette smoke—what a turnoff! Should you walk?

When to overlook: You can fix most smells that don’t lead anywhere, although it might take time. I know a buyer who got a great deal because the house smelled like an ashtray. That smell didn’t leave right away. After professional carpet cleaning, freshly painted walls, and a lot of time with the windows open, however, the smell is gone.

When to worry: Some smells are a sign of a bigger problem. Does it smell wet? Better have the house inspected thoroughly for mold and mildew, or even water damage. Other smells may be more than you’re willing to bear. As a real estate agent, I’ve shown a house with a strong pet smell that sent my buyers retching and running for the exits.

Garbage and clutter

Distress sales, in particular, often have personal effects and junk strewn all around.

When to overlook: Depending on your capabilities and how badly you want the house, you may not care if you take a few loads of garbage to the dump yourself.

When to worry: Make sure the trash isn’t covering up bigger issues, and don’t forget to factor the cost of cleaning and dump fees. Avoid houses that may be contaminated and require cleanup of toxic materials.

Bad decorating

One person’s dream house could be your nightmare.

When to overlook: If the house is more than a few years old, you’ll probably want to change the decor anyway. What difference does it make if the walls are tangerine or purple now? Ugly carpet shouldn’t stop you from buying a house, especially if you can fit new flooring into your budget fairly soon.

When to worry: Some decorating mistakes are harder to fix than others. If all the floors and counters are covered with tile you hate, this might not be the house for you. The same goes for awkward floor plans, or strange features like a fish pond inset in the entry floor. You might also be leery of strange projects that look as if they were the handiwork of someone who had no idea what they were doing.

Fixer home in snowfall
It’s worth it to come home to this.

Sally Herigstad

The post I Fell in Love With a Fixer-Upper: A Tale of Romance Gone Horribly Wrong appeared first on Real Estate News & Insights | realtor.com®.

4 Things I Wish I’d Known Before I Got an FHA Loan

August 3, 2018

Michail_Petrov-96/iStock

A few years back, my husband and I were growing out of our two-bedroom, 850-square-foot rental in St. Petersburg, FL. We had one child, one cat, and lots of stuff. In short, it was time to move.

We didn’t think we were ready to buy, but a friend (it always starts with a friend, doesn’t it?) had recently bought using a Federal Housing Administration loan, and it was working out wonderfully.

My husband and I had decent credit scores and low debt, but we certainly didn’t have 20% to put down on a home. An FHA loan—which allows the buyer to put down as little as 3.5%—sounded like a dream come true. We found an FHA-approved lender, and in no time, we were on our way to buying our first home with a government-backed loan.

But in the middle of this process, someone asked us how much our mortgage insurance would be.

“Mortgage insurance?” I asked. “What’s that?”

Unfortunately, our lender hadn’t explained much about the rules and restrictions surrounding an FHA loan. We learned the hard way—after it was already a done deal. It didn’t stop us from landing our starter home. But here are four things I wish I’d known before I signed on the dotted line.

1. You’re on the hook for mortgage insurance for the life of the loan

Let’s get into the first thing you’ll have to factor in with an FHA loan: mortgage insurance.

This is a payment that’s usually required when the buyer isn’t putting 20% down. (You might know it as PMI, or private mortgage insurance; the FHA’s version is called MIP, or mortgage insurance premium.)

The buyer (you) must pay monthly mortgage insurance to protect the lender in case you default on your loan—it’s the price you pay for landing a mortgage with such lenient qualifications.

Now, the twist: It used to be that you had to pay this mortgage insurance on an FHA loan only until you gained 20% equity in your home. But under legislation passed in 2013, you can plan on paying that extra money for the life of the FHA loan. Yikes! (You can skirt this requirement if you put at least 10% down, but that kind of defeats the purpose of the sweet, low down payment option, right?)

All is not lost, though: Eventually, your monthly payments will go down as you whack away at your loan amount.

“But for the first few years, a buyer is paying mostly interest rather than principal, so the loan amount doesn’t go down for quite a while,” says Robert Harris, owner and mortgage consultant at All in One Lending.

2. You can’t buy just any house within your approved loan amount

As long as the bank thinks you’re good for the loan, why wouldn’t you be able to buy any house you want? Well, the FHA has a few more hoops to jump through than conventional loans.

To be approved for the loan, the house must pass an inspection conducted by the U.S. Department of Housing and Urban Development. A licensed, HUD-approved appraiser will determine the market value of the home and do a “health and safety” inspection to check for crucial problems such as a crumbling foundation or issues with the mechanical systems.

“Many people don’t know that the guidelines can be pretty strict for an FHA loan,” says Paolo Matita, a former real estate agent who says the inspection was an issue for his FHA loan–holding clients. “The roof, AC unit, plumbing, and electrical all need to be fully functional and be able to last for several years if they’re going to pass inspection.”

(Note: This inspection is not a substitute for a regular home inspection, which you should absolutely get, too.)

What’s more, if the house requires certain repairs in order to pass inspection, they must be completed before the sale can go through. This can create another hurdle for FHA buyers: You either fork over the money to make the repairs, or ask the seller to take on the cost—a pretty big risk, especially in today’s seller’s market.

In the end, you might end up having to walk away from the deal.

3. You might not be able to use your loan for renovations

My husband and I found a house that had potential but needed serious TLC. The home was under budget, so we thought we’d just tap the unused portion of the loan to make repairs. No biggie, right?

It turns out, the type of FHA loan we’d signed onto didn’t allow renovations. Had we done more research upfront, we would have discovered that there is a loan out there that would have allowed us to buy and repair that fixer-upper: an FHA 203(k) loan.

With a 203(k) loan, you can dedicate up to $35,000 for home improvements. The lender will have a say in what kinds of repairs you can make, but the 203(k) loan can be a great solution for first-time home buyers who don’t mind doing a little work.

4. You still need decent credit for an FHA loan

While we didn’t have ultrahigh credit scores, getting an FHA loan wasn’t a free-for-all: Buyers must have a 580 credit score to take advantage of the 3.5% down payment option. Lenders also have a stake, and will often demand a credit score of 600 or higher to qualify. (Our lender required a credit score of 665 or better.)

The FHA also has specific requirements about how much debt you can carry, so check current guidelines to make sure your debt is manageable in the eyes of the government.

An FHA loan afforded us a rock-bottom interest rate with a low down payment. But don’t assume an FHA loan will be a slam dunk into homeownership—do your homework and weigh the pros and cons to determine whether an FHA loan is truly right for you.

The post 4 Things I Wish I’d Known Before I Got an FHA Loan appeared first on Real Estate News & Insights | realtor.com®.

What to Look For in a Fixer-Upper: Signs the Home Isn’t a Money Pit

August 3, 2018

Home renovation

Vladimir Vladimirov/ istock

Renovating a fixer-upper is not for the faint of heart. It takes money, hard work, and patience. But if you’re able to pull off a successful transformation, you’ll reap the benefits.

“Fixing up a house is an incredible opportunity, but should never be viewed as a TV show. It’s real life,” says Elizabeth Enright Phillips, a financial coach at Running Creek Properties in Lancaster, OH, who has renovated nearly a dozen properties.

Best-case scenario: You’ll end up building your dream home and increasing the value of the property. But fixing up a ramshackle house can cost a fortune. Unforeseen problems can surface that will make your fixer-upper a real money pit.

When looking at real estate listings, you’ll notice that no two fixer-uppers are the same. One may have sat vacant for a while, another may be in desperate need of a new roof, and another may have a mold infestation. Each of these scenarios will cost money to rectify, but some situations are more manageable than others.

To help you out, we tapped experts to identify the features and characteristics you should look for in a fixer-upper, to make the renovation go much more smoothly. On your hunt for that hidden gem of a fixer-upper, keep your eye out for the following signs.

Strong structural elements

A solid structure is ideal for any home, but it’s especially critical when you’re buying a fixer-upper. If the home has a crumbling foundation or serious roof problems, you’ll have to decide if you’re willing to pay to repair this type of damage.

These are the five important structural elements:

  1. Roof
  2. Heating, ventilation, and air conditioning (HVAC)
  3. Plumbing
  4. Electrical
  5. Foundation

 

Mike Coughlin, owner of Summit Design Build in Stoneham, MA, says you can get a good idea of the house’s structure by exploring the basement, attic, and unfinished areas. Focus on those areas rather than the pretty, recent additions to the home.

“You want to look at the basement rather than the granite counters and new bathroom fixtures. All of that shiny stuff is really easy to fix,” says Coughlin, who is working on a nearly 300-year-old home that he bought with his wife, Francine. “The stuff behind the walls is what’s more important. As long as the bones are good, you can pretty much do anything.”

Only minor plumbing problems

There’s a good chance that your fixer-upper will need plumbing work. Depending on the scope of the project, the work will be either a quick fix or a significant undertaking that will eat into your budget. Some fixer-uppers may have low water pressure (fairly minor problem), while others may have pipes that need to be replaced (a big problem).

Before buying a fixer-upper, make sure you’re comfortable with the amount of plumbing work required to bring the place up to snuff.

That said, you shouldn’t immediately flee any fixer-uppers that need plumbing work. If you really love the house, it’s all about balancing costs and diverting money from one project to another.

A sound layout

A logical layout is important in any home (no one wants to walk down a long hall to get to the guest bathroom), but it’s especially critical when you’re looking at an old home. Older homes are often divided into small rooms, but many people in this decade favor an open floor plan.

“The entire family wants to be connected; no one wants to be stuck back in the kitchen when everyone else is hanging out. With an open floor plan, there is no separation between the zones of the house,” says Jean Brownhill, founder and CEO at New York City–based Sweeten, which matches people who have major renovation projects with general contractors.

If you envision needing to knock down walls to create a more open, airy interior, know that the job can be expensive, time-consuming, and dusty.

Little to no infestations

It’s not uncommon to encounter a fixer-upper that has an infestation, be it mice, termites, mold, dry rot, or asbestos. A minor issue such as mice can be resolved by putting out traps and filling holes in the house. However, severe termite damage could require a costly solution, including lifting the house (yes, right off the ground) to access the foundation and check for further damage.

A seller is required to disclose such infestations, but a home inspector will also uncover any issues during the inspection that may occur after the house goes into contract.

If you find any of these problems in your fixer-upper, it’s a good idea to get an estimate from a contractor to resolve the issue.

Recent occupation

Buying a foreclosed home that’s sat dormant for a few years might get you a low sale price, but it may also present a challenge when you start renovating it.

“You never know what’s going on with plumbing behind the walls,” Coughlin says of homes that stand empty for an extended period of time. Maybe the water wasn’t turned off properly in the winter, which can cause the pipes to freeze, split, and leak.

A home without humans can also become a refuge for critters such as squirrels and bats.

“We have found dead mice and rats and a live mother possum feeding her two babies in attics,” says William Begal, president of Begal Enterprises, a disaster restoration company in Rockville, MD.

All of these problems can be fixed—they’ll just add more to your bottom-line costs.

The post What to Look For in a Fixer-Upper: Signs the Home Isn’t a Money Pit appeared first on Real Estate News & Insights | realtor.com®.