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This article describes buying a "HUD Renovation Home" and includes advice from a company providing mortgage and financing advice and funding. The true cost of buying any home is not just the initial purchase price. Rather, the true cost of buying a home is the sum of the initial purchase costs plus the costs of repairs that are required to make the home safe and habitable.
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A HUD home renovation may be a wise choice if you are in the market to buy a house. Many factors weigh in when making the decision to renovate a HUD home. The condition in which the property is bought, programs available through HUD and repairs that will be needed contribute to deciding if a renovation is a considerable option.
A Home's Condition at the Time of Purchase
When buying a HUD home, the price is set by HUD based off fair market value and the necessity of repairs for the property. The more repairs the home needs, the lower the price will be. Since HUD homes are sold as-is and are previous foreclosures, expect the condition to usually be less than satisfactory. Appliances and fixtures can be missing, carpet and flooring could be destroyed, there could even be gaping holes in the walls. If it is an older home, it may not be the slightest bit energy efficient. It is beneficial and highly suggested to perform a home inspection by a seasoned contractor before placing a bid on the property so that all repairs can be factored into the bidding price.
HUD's Rehabilitation and Repair Home Loan
Although HUD does not directly supply loans, through the Section 203(k) program, they partner with local agencies to provide lending for rehabilitating HUD properties. The loan can be used for room additions, painting and decks if other repairs are not needed. The loan is based off the value of the home once the work is completed, and includes the cost of the renovations.
This program came about due to borrowers having to obtain an interim loan to purchase the house, and then another high interest rate loan to take care of remodeling, followed by a third and permanent loan once work was finished. An important factor to remember about this rehabilitation loan is that once the loan is closed, the amount cannot be adjusted. Therefore, it is crucial to use an experienced contractor throughout your HUD home buying process from before the initial bid to the completion of the renovation.
Watch out: The true cost of buying any home is not just the initial purchase price. Rather, the true cost of buying a home is the sum of the initial purchase costs plus the costs of repairs that are required to make the home safe and habitable.
Unless you have a thorough home inspection performed by a qualified expert, a Hud Renovation Home or any other home that is in disrepair may sadle you wiith any of a variety of costly or dangerous defects that need attention before the home can be safely occupied. In other words, caveat emptor - buyer beware..
Not all HUD homes need extensive repairs, but when they do, the most basic repair costs typically include at least ensuring the home is energy efficient, replacing flooring, interior painting, and installing appliances. Notably, homes built before 1978 when lead paint was still used will require a special removal process.
Un-recognized hazards as basic as lead paint can mean extra costs that you have not anticipated. On older homes where lead paint may be a hazard, be sure to review HUD's "Renovation, Repair and Painting Rule".  Excerpting from that rule:
All air conditioning, heating and ventilation pipes and ducts must be insulated if they are in unconditioned spaces. Smoke detectors are also required to be placed in the homes sleeping area. Heating and air conditioning units must not be over sized for the space. HUD requires homes to meet their Minimum Property Standards and several energy conservation specifications.
Why Consider a Renovation?
When a HUD home requires a vast amount of repairs, its price reflects accordingly. HUD takes the price of repairs into account before setting the selling price. Even with having to completely renovate a HUD home, you are still getting a fantastic deal. Especially when considering their home rehabilitation and repair home loan option that will assist with the financing of the property's renovation.
Whether HUD or not, a remodel will ensure a home is uniquely yours, and gives you the say so in the cosmetic aspect of decisions that will make the home aesthetically pleasing to you and your family.
Many choices are made by you, the homeowner, and are not just builder grade; economic picks that are mass produced exactly the same in every house in your neighborhood. The luxury of all these choices is usually reserved for those who custom design their home from the ground up, or those who remodel after developing quite a bit of equity in their residence.
The HUD home buyer gets to enjoy the benefits of a custom home with a fraction of the cost, since they are getting the property at a comparatively low initial price.
Traditionally, you had to pay out-of-pocket to do remodeling and then inquire about FHA loans, due to FHA's strict requirements on up-to-date conditions. The FHA 203(k Rehab loan bridges this gap by allowing you to create one lump mortgage that provides funds to remodel the home.
The 203(k) mortgage is recommended for any HUD home in a state of repair because it allows the potential homeowner to acquire draws of immediate funds, create escrow for contracted repair work to ensure compliance in errors, and bring the assurance of knowing repairs and the remodel are kept up to code. 
The application process is the same as an FHA loan; First-time homebuyers are eligible for specific tax credit benefits. First, you have to determine if your HUD home is "insured" or "un-insured". You might be eligible for a 203k loan that includes rehab funds if HUD home is "un-insured". . There are three major areas of the 203(k) that need to be considered:
Minimum safety standards for FHA 203(k) Financed Projects
The mortgage must conform to the minimum safety standards by HUD. These include inspections as well as code-regulated remodeling.
Maximum mortgage amounts for FHA 203(k) Financed Projects
No more than 100% of the projected value of the home can be included for the mortgage. Values are based on a professional appraisal. A minimum of $5,000 is required for existing structures and improvement on the property. Construction periods must begin within thirty days of an agreement. A contingency reserve will also be required on any property that is older than thirty years and over $7,500 in rehab costs.
Remodeling requirements Rehabilitation is strictly limited to the interior of the dwelling and cannot allow for "luxury" renovation. A homeowner can, however, use funds for room additions, paint, energy efficiency, and improvements.
Frequently Asked Questions (FAQs) about HUD Loans for Home Renovations
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