If you’re house hunting, it’s quite possible you’re looking at “distressed properties.” These are properties that are in foreclosure or at risk of foreclosure (for example, the current owner is more than 30 days late on the mortgage). Nationally, distressed properties accounted for 35% of existing home sales in February. With roughly 15% of mortgages in default, it’s likely that distressed property sales will continue to be significant for months to come.
An advantage of looking at distressed properties is you may get a bargain. The current owner is under pressure to sell the property and may accept less than market value. A disadvantage is they sometimes need repairs. This can be a serious impediment to getting a loan. Lenders generally expect homes to be “move in” ready. (If you default, the lender doesn’t want to be stuck with a home it cannot sell.)
In distressed property situations, the seller may not have the funds to make the repairs or may need to sell the property quickly. If the property is in foreclosure, the bank is selling the property “as is.” The repairs are your responsibility. Of course, it doesn’t make sense for you to pay for repairs until you own the property. If something gets in the way of closing, the money you spent on repairs is gone. What you need is the ability to purchase the property with a contingency that the repairs will be made.
Say hello to the repair escrow program. This conventional mortgage program allows you to purchase a home and escrow for the repairs at closing. The program limits the repairs to the lesser of 15% of the property value or $15,000, and the necessary repairs must NOT affect the livability, soundness, or structural integrity of the property. (The lender determines whether the repairs are acceptable.)
For example, if the previous owner stained the walls and carpets or removed the stove, the lender probably would accept the repairs. Similarly, a poorly working A/C or heater probably would pass muster. However, if the previous owner removed the sinks and toilets, the lender probably would consider the property unlivable. Similarly, if the property has rotten flooring, the lender probably would consider the property unsafe and unlivable.
The program is available for primary residences, second homes, and investment properties. Manufactured homes are ineligible. The repair funds are escrowed by the lender and must equal 150% of the repair bid or contract. Either the buyer or seller can provide the funds. The repair cost must be determined by contractor or vendor bid or by a signed contract. The repairs must be completed in 60 days.
The program is not for all situations. Properties needing major renovations or that have been seriously vandalized may not fit. However, for situations of deferred maintenance or simple neglect, this may be just what you need to complete the purchase.