distressedIt’s easy to forget that, when buying a distressed home, it’s not just the seller who’s having issues. The building itself, especially if it’s bank-owned (and likely neglected) is often in a state of disrepair — everything from weather damage to wood rot to worse.

A family that buys a foreclosure or REO might love the discount (an average of 27 percent), but then get sticker shock when the repair estimates come in.

So meet HUD’s 203(k) program, which offers loans to buyers of distressed properties so they can make repairs.

There are restrictions, of course. Some of them:

  • The property must be a one- to four-family home, or an individual condo unit (if the condo complex is FHA certified).
  • It must be the borrower’s primary residence (or for a HUD-approved non-profit).
  • It must be at least a year old.
  • Most of the property is residential — at least 75% of a one-story home, 51% of a two-story building, or 67% of a three-story building.

But the use of the loan is might flexible.

  • It can be used to rebuild a demolished home (as long as the foundation is still there).
  • It can be used to convert a one-family home into one for two, three, or four families (or to decrease a larger building to make it into a one- to four-family home.
  • In some cases, it can be used to move a house onto the property permanently.

So if you have clients looking at a distressed property but scared of the repair bills, have them check out a 203(k) loan.