The words "as is" can be scary, especially when buying a home in today's market, where foreclosures and short sales that need fix-up work are plentiful.
But a little-known Federal Housing Administration loan program that's been around since 1978 can help take the sting out of "as is." Only 219 borrowers took advantage of the FHA's 203(k) program in 2009. Not many lending and real estate professionals are aware of the program, observers say.
Last year, Tom Meyer found a classic Oakland home built in 1925. As a short sale, it was priced right, at half the original asking price. Trouble was, the place needed foundation improvements, dry rot work, a new roof over the garage and other improvements.
With the help of the FHA's 203(k) renovation financing loan program, Meyer folded about $100,000 worth of repairs and improvements into his $422,000 mortgage. He bought the home for $320,000.
"I would not be able to pay a contractor $100,000 and buy a house at the same time," said Meyer, 58. "It had been essentially allowed to start falling apart over the last 20 years."
He had rented in San Francisco for 25 years before moving into his new digs in September with his girlfriend, Cathy Keating.
"We like old houses, and a great benefit of this program is that it helped us keep a beautiful but deteriorating house from deteriorating further. With the work we did, we expect it to still be standing and beautiful 80 years from now," he said.
Renovation financing through the 203(k) program allows the costs of repairs and improvements to be included in the FHA federally insured loan amount instead of having the buyer come up with cash or another loan to do the work.
"This is a perfect loan for an as-is situation," said Kristine Marr, a loan officer with Prospect Mortgage in Lafayette. "It's not a new loan program, although I think it's going to have a lot more use today because we have so many foreclosures and bank-owned properties. You go into lots of homes and see people have yanked out stoves and ovens and fixtures and sinks."
The work has to be done within six months after escrow closes. Borrowers have the option of putting up to six months of mortgage payments on the end of the loan if they don't want to live in the house while the work is done.
"Renovation financing is a program that allows you to not only finance the purchase of a home but finance any repairs and-or improvements. It provides (buyers) with a responsible way to purchase a fixer-upper property," said Luis C. Munoz, who helped Meyer with the loan and is a renovation loan specialist with Mason-McDuffie Mortgage Corp.
Munoz also gives presentations about the program at monthly home ownership workshops sponsored by the Unity Council, an Oakland-based nonprofit.
A 203(k) loan can help buyers finance minor and major repairs and improvements. It also can help buyers compete with investors when bidding for short sales and foreclosures, said Sheri Powers, director of the Homeownership Center at Unity Council.
"Property repairs cost money and they want to make sure people using their loan program are going to be in the home in long run and not just the short run," Powers said.