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The “rehab” mortgage offered by FHA is a wonderful product, but also wrought with confusion for many potential home buyers. One of the areas that confuse buyers is that there are actually 2 different appraisal amounts that the home must meet in order for the mortgage to be approved.

Below is a basic example of how this rehab mortgage works:

A buyer finds a home listed at $50,000 that needs repairs and/or updates to make it livable for them.   The home is priced under the current market values to reflect the repairs needed.  (IE Home values in the area are $65,000 to $70,000).

The buyer wishes to purchase the home using a FHA 203K mortgage and borrow above the purchase price to pay for the needed repairs and/or updates.   Buyer and their contractor estimate the repairs would come to approximately $20,000.

Buyer makes an offer on the home for $45,000 stating in the purchase agreement that it is contingent upon receiving this FHA 203K loan.   The buyer then submits documentation for their mortgage pre-approval AND documentation from their contractor that specifies the repairs that will be done to the home and the cost of labor and materials.

The mortgage lender then orders an appraisal - a 2 part appraisal. The first part appraises the value of the home before repairs.   This appraisal must be for at least the $45,000 purchase price that the buyer offered.  The 2nd part of the appraisal is then done by the appraiser and it must state the homes value after repairs is $65,000 give/take a 10% variance.

If the home does not meet these 2 appraisal values then the 203K rehab loan will be denied.

The 203K rehab loan is a terrific product, but it is imperative that your buyers agent has a solid knowledge of the market value of the home, both pre-repair and after repair.   If the pre-repair purchase price is too high, then the adjusted after repair price will be too high for the appraiser.   Ask your buyers agent to analyze the true market value of the home you wish to purchase, and sit down and go over the numbers carefully before writing your offer.

~Kris Wales~  A partner for your real estate needs in Macomb County MI
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