Here's a story that's become all too familiar to real estate agents and buyers in today's housing market. A buyer finds a house they love with great potential, and pays for an inspection. During the inspection the buyer begins to dream about the possibilities in this home. From the redecorated living room to the freshly painted bedroom to the great garage to cover their car, this buyer is ready to move in long before any deal is done. Then one day the inspection comes back and it's bad news. The home inspector found old paint, likely lead-based. This means the house won't pass FHA inspection, and the paint problems need to be addressed.
Many buyers run into this problem and simply want to give up and move onto the next house, dashing their dreams of the perfect home they were already redecorating in their head. However, all is not lost. Let's take a look at how one mortgage consultant handled this situation recently.
A real estate agent emailed this to Portage mortgage banker Jeremy Drobeck: Attached is the lead-based paint (LBP) inspection report. Findings are positive for LBP and the estimate provided in the report far exceeds the $4,000 stabilization threshold as set by HUD. Due to this, HUD will not facilitate stabilization on this property.
Not sure if you guys have had to deal with this but I have a number of times. Just so we are on the same page here’s how I handle it.
- On all FHA 203b loans where the house was built before 78 HUD test for LBP, if its under 4k then HUD pays the contractor directly prior to closing and takes care of the problem, if the bid HUD gets is over 4k then they will not let the house be financed on an FHA 203b loan with or without a repair escrow.
- We switch it to a 203k.
- Borrower gets bid from a LBP certified contractor to paint the areas that popped for lead.
- HUD will give a 4k credit at closing towards that painting.
- I have a guy that many times can correct those areas for 4k or less (of course they can use an LBP contractor they want). For example in this case they need the outside of the house painted and the door jambs inside. If the bid is say 4k then they get a fresh coat of paint on those areas paid for by HUD, its actually a great thing for the buyer.
- The other repairs will still get financed into the loan and we still need bids for those.
- The borrower can add to the loan any other repairs they want. Say they want a new kitchen, no problem we can throw that in there.
- We have 6 months after closing for all that work to get completed, so we need bids and all that before closing but then we close you get paid, your out of the picture and we take it from there.
- Downside of all this to the buyer is that the rate is anywhere from .5 – 1% higher, closing costs are slightly higher.
All and all its usually works out to the buyers benefit. Also something to note, if the buyer backs out HUD will have to put the home back on the market and this time it will say that it is not insurable as an FHA loan but is eligible for a 203k.
That is how the FHA 203k renovation loan can help a home buyer solve lead-based paint problems without returning to house-hunting mode. You can learn more about the 203k loan and how it can help you buy your dream home, click the button below.