Obtaining Hard Money Loans on Homes that Require Repairs
Homes that require repairs are generally listed and purchased below fair market value. This makes these homes very desirable for real estate investors. However, they often do not finance through traditional banking institutions. The following explains why banks avoid lending on homes that require repairs.
Bank lenders use FHA guidelines, which help them to determine what condition homes need to be in to obtain a loan. Major systems, such as electrical, plumbing and heating need to be in proper working order. Additionally, the roof has to be in condition with a five-year certification and this type of loan requires no holes in the floors or walls. Flooring must be intact and in good condition; however, with some types of loans carpet can be missing. Lenders will not stray from FHA requirements. If a home does not meet these conditions then traditional financing is not optional and buyers will have to look for alternative means, such as a direct lender or hard money lender.
The government federally insures FHA loans, which is why these particular types of loans allow buyers to put little money down. Conventional loans are not federally insured, giving banks slightly more leeway. Some conventional loans require stricter regulations, while some do not. If one conventional lender will not loan on a home, it does not necessarily mean another lender will not. Shopping around is best under these types of circumstances.
There are other types of government-sponsored loans, such as USDA and VA. States also offer different types of loan programs with different requirements. Most government programs have the same requirements as FHA or may have stricter lending regulations.
There are many ways to obtain a loan on a house that does not comply with traditional or government financing.
• Seller – Request that the seller make repairs before closing so all loan requirements are met.
• REO Properties – REOs are bank owned foreclosures. Some banks will make repairs and some will sell homes “as is.” Some REO sellers will make repairs if necessary to appease lenders.
• HUD Homes – HUD will not make any repairs for lenders. Buyers’ best option is to pursue financing with a hard money lender.
• Short Sales – Sellers rarely have the funds to make any repairs in short sales. This is an opportune time for buyers to explore working with a direct lender.
• Auction Sales – Repairs are never offered on auction properties. They are sold in “as is” condition and require cash funds.
Hard money lenders lend on houses that require repairs. They offer short-term loans to investors that want to “flip” houses, offering terms that are less than one-year. These loans are specifically designed for fix-and-flip designs and are ideal for short-term solutions.