How to Obtain a Mortgage for an Uninhabitable House

An uninhabitable house presents both a challenge and opportunity for potential buyers. Such homes are often priced far below market value because they require so much work to become habitable. But at the same time, most traditional mortgage lenders won't loan potential borrowers the money to buy these homes until they've been repaired. There is hope for home buyers, though, who want to purchase homes that need significant work to reach "livable" status: the 203(k) program offered by the Federal Housing Administration (FHA) of the U.S. Department of Housing and Urban Development. This loan program allows you to take out a mortgage that not only covers the sales price of the home, but also the cost of its required improvements.

Gather and copy the financial papers you'll need to verify your gross monthly income and monthly debt levels. These papers include your last two federal income tax returns, last two paychecks, bank savings and current account statements, credit-card bills and other loan statements.

Search for a mortgage lender that is approved by the FHA. Once you find one with which you are comfortable, explain that you are interested in purchasing a home that is currently uninhabitable, and that you'd like to use a 203(k) loan from the FHA to do so.

Send your lender by e-mail, fax or mail the copies you made. Your lender will look at these papers to determine that your monthly debt obligations, including your new estimated mortgage payments, are less than 36 per cent of your gross monthly income.

Perform a feasibility analysis of the property with a home inspector and a real estate agent. After this analysis, you'll calculate how much you expect the home's repairs to cost. This figure, plus the agreed-upon sales price of the home, will make up the total mortgage loan amount that you request.

Give your lender permission to send an appraiser to the property. This real estate professional will determine the potential value of the home after repairs are made. You will have to pay for this appraisal. This usually costs about £260.

Allow your lender to run a credit check on you. This will give your lender or bank access to your three-digit FICO or credit score, a number that tells lenders how responsible of a borrower you've been in the past. If your score is 720 or above, you will qualify for the lowest interest rates.

Set a closing date for your 203(k) loan if your mortgage lender approves your application. At the closing, you'll sign the papers that officially close your loan and transfer title of the home to your name. You'll also have to pay any closing and origination fees that are due.

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Things Needed

  • Copies of your two most recent federal income tax returns
  • Copies of your two most recent paychecks
  • Copy of savings and current account statements
  • Copies of credit-card bills
  • Copies of other loan statements, including auto, personal and student

About the Author

Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.

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