If you're handy or you have a Dad/cousin/sister/friend who has a knack for fixing things, you might be tempted to consider buying a "fixer" or "contractors special." It's hard to pass up that amazing deal in Maxwell Park or Temescal and you're remembering how, back in the day, you helped your Dad fix the house or build a deck. You might even be a mechanic or have otherwise worked in a industry where you fixed or built things. However, unless you are a licensed contractor, have a lot of money, or you're able to convince the seller to put up 1 1/2 the cost of the repairs, you aren't likely to be able to get a loan to buy a house that needs major work.
What do I mean by major work? I mean that one or more of the "systems" of the house is not fully functional - ie plumbing, electrical, roof, foundation, there's no toilet or hot water, all of the windows are broken, a renovation project isn't completed, the front steps are so eaten by termites that you might fall through, etc...
We all know that lenders have gotten more conservative. In addition to scrutinizing you and every other buyer more carefully, they are scrutinizing properties more carefully. They do not want to assume the risk of lending money on a home that the buyer may not be able to afford to repair. Their fear is that buyers may run out of money while trying to fix the home and they may default on their mortgage. Lenders also worry that if the buyer never has the work done and he or she defaults on the mortgage, they might be forced to foreclose on a home that isn't worth very much and won't be easy to sell because of its condition.
So you can't just say to your lender, my friend Jojo does this kind of work all the time, we'll have it fixed in no time. They're not trying to hear it. What they often want to see is that there is an estimate for the work that needs to be done from a licensed contractor and someone is willing to put one and a half times the cost of the repairs in an escrow account with a guarantee that the work will be done shortly after escrow closes. Lenders will usually be looking to you to come up with the money. If your down payment and closing costs will exhaust your resources, you may need to secure a gift. If that's not an option, you can ask the seller to put up the funds (you are capped to 6% of the purchase price for funds to repair and any other credits for closing costs if you have an FHA loan) or do the repairs while in escrow. If this property is in a great location, the seller is unlikely to do this since there are plenty of buyers in the Bay with the funds and resources to buy and rehab fixers.
For most first time buyers, fixers are not worth the trouble. For a property with huge potential (great location, etc), the seller is unlikely to accept an offer from a buyer who cannot prove that they have the capacity and willingness to both secure a loan and pay for the repairs. Even if the buyer's offer is accepted, it will be challenging to keep the deal from falling apart as the bank's appraiser notes the problems and starts asking the buyer to come up with proof of funds to repair. For most first time home buyers of average means, it's best to stick to homes that are a bit more expensive but in decent condition.
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