With such a high level of distressed properties flooding the real estate market, there are great opportunities for a good deal among these available homes. But many people cannot afford to come up with the down payment and closing costs and then also come up with the money to complete the needed repairs after closing — or can they? What if the down payment were really low (FHA only requires a 3.5% down payment) and what if the seller agreed to pay closing costs and what if the lender would give the borrower the money to do the repairs after closing? Now we’re talking…
Lets use a practical example. Lets say there is a great opportunity to purchase a house for $200,000 but the house needs a new roof, new carpeting and a paint job. The first step is to put in an offer and have the seller accept it. In this case we are assuming that price is $200,000. Then you would get quotes from contractors to do the work needed. Lets assume the roof would cost $10,000 and the carpeting would cost $5000 and the paint job would cost $5000. The total work needed is $20,000. The lender requires an additional 10% contingency (in case you run into unexpected expenses after the project is started. All this adds up to $22,000. The lender will take the $22,000 and add it to the $200,000 sales price making the acquisition cost $222,000.
The required down payment is based on the acquisition cost of $222,000. At closing, the seller would be paid the $200,000 that is owed to him/her and the remaining $22,000 would be put in an escrow account (although some of it can be received upfront to get started with the project). The contractors do the work and then the lender pays them. The buyer ends up with a great house with no worries.