Financing Programs for Rehabilitating Homes
Interested in buying a fixer-upper? Getting a loan for property that needs substantial repairs requires specialized financing. One potential source is a combination of the FHA 203(k) (or the Streamlined Limited Repair version) and the FHA Energy Efficient Mortgage (EEM). Similar loans are also available through the Veteran’s Administration and in the conventional market with the Fannie Mae Homestyle EEM loan.
The FHA 203(k)
This program finances some major renovation costs, including: Structural alterations and reconstruction; changes for improved functions and modernization; (eliminating health and safety hazards); changes for aesthetic appeal and elimination of obsolescence; reconditioning or replacement of plumbing, heating, air conditioning and electrical systems; installation of well and/or septic system; roofing, gutters and downspouts; flooring, tiling and carpeting; energy conservation improvements; major landscape work and site improvement; and accessibility accommodations for a disabled person. The minimum cost of improvements is $5,000; the maximum is limited by the appraised value of the property (after renovation).
The Streamlined 203(k) loan permits homebuyers to finance a maximum of $35,000 (based on the appraised value after renovation) with fewer administrative requirements. Get more details on the FHA 203(k) loan. Find lenders who originate 203(k) loans.
Energy Efficient Mortgages (EEM)
The EEM offers a way to do some additional improvements on properties above the appraisal limit! An EEM can increase your buying power by as much as $8,000 (FHA) and as much as $6,000 (VA). The EEM can be used for both purchase or refinance transactions of owner-occupied, single-family residences, PUDs and condominiums. The homes may be new construction or existing housing. The improvement must be “cost-effective,” meaning that the projected energy savings must exceed the cost of the improvement.
The calculation for EEM considers that energy efficient homes cost less to operate on a monthly basis, so the estimated energy savings is added to the borrower’s income to allow the buyer to qualify for a larger total mortgage amount. By increasing borrowing power, the EEM allows borrowers to include the costs of the energy-efficient improvements into the total mortgage amount. The value of the home is then adjusted by the value of the energy improvements.
The EEM calculation requires a Home Energy Rating System (HERS) report from an accredited professional. The report fee ranges from about $300 – $450 (a portion can be included in the loan amount). The rater inspects the home and measures a variety of components, including but not limited to: insulation levels, window efficiency, heating and cooling system efficiency, duct leakage and solar orientation. The rater generates a score between 1 and 100 that indicates the relative efficiency of the home as well as an estimate of the home’s energy costs.
The home buyer can then evaluate and select specific cost-effective, energy improvements. The energy rating report will provide the lender with the net present value of the energy savings. Find a certified HERS rater. Another advantage of the EEM is the federal tax credit for energy improvements. The tax credit for energy-efficient home improvements has been extended to December 31, 2011. The earlier law established a credit for 30% of 2009 and 2010 expenditures on energy-efficient insulation, windows, doors, roof and heating/cooling equipment in U.S. residences, not including installation. For 2011, the credit percentage is reduced to only 10% and the maximum credit is only $500 reduced by credits claimed in earlier years. Credits for certain items are subject to dollar limitations. You must obtain an itemized invoice from your retailer or installer.
Consult a tax professional about possible energy tax credits.