Mortgage Financing Part 1.5: Why you should care
Most people probably don’t find mortgage financing to be a particularly riveting topic. However, as I finish up part 2 of this short series, I want to illustrate why educating yourself (even briefly) on the topic can be vital to your home buying process.
When my wife and I were looking for our first home we had a whole wish list of things we wanted to find in that perfect property. One of those ‘must haves’ was a good-sized chunk of land. Early in the hunt, we thought we had found THE ONE. A 3-bed, 3-bath, Frank Lloyd Wright-inspired ranch situated on over twenty acres of forested land that included a 1-acre pond and backed up to the national park. We were in love. So much so that on our first walk-through we somehow glossed over the fact it was a total disaster inside! Only on our second walk-through did the fog clear from our vision and we saw what a serious project we were considering. The kitchen, the bathrooms, the entire lower floor, all needed to be gutted. Unfortunately, the house was already near the top end of our budget and after a down payment we wouldn’t have money left over for all the repairs that were needed. We simply couldn’t afford the house and the repair costs. Dejected, and seemingly out of options, we continued our hunt elsewhere and left our ‘forest house’ behind.
Looking back, there were actually several reasons that house wasn’t ‘the one’ for us. However, lack of repair costs didn’t have to be one of them. The real problem was that I simply wasn’t aware of any alternatives. Well, as you will hopefully read about in Part 2 of our discussion on mortgage financing, we actually may of had another option. The FHA-sponsored 203k loan.
This loan is designed to allow buyers to purchase and make repairs to older homes. You can actually get approval for up to 110% of the estimated after-repair-value (ARV) of the home in question! This means that if you find a home for $130,000 that would be worth $200,000 all fixed up, the bank will loan you up to an extra $90,000 to get all the necessary repairs made. Obviously, there are much stricter requirements with a loan of this type (we’ll get into the details in part 2), but it can dramatically increase your options. Now, even fist-time homebuyers can purchase a fixer-upper without needing to have the repair costs socked away in savings.
The point is that I didn’t even know this was an option at the time. If I had done more reading or talked to a few more people, we might have been able to figure something out. I’ve since learned that It’s difficult to find the right answers if you don’t know enough to ask the right questions.