FHA Rehab Loan for REOs or Properties in Need of Repairs

Buyers targeting “fixer-uppers” or homes selling at the low price range within their area may well benefit from the FHA’s Streamlined(k) Limited Repair Program. A supplement to the Section 203(k) rehabilitation program, the Streamlined(k)is meant to address buyers’ more common needs for repairs not requiring structural work, detailed drawings, or architectural plans. Buyers with as little as 3.5% down payment money are still eligible for the program that allows up to $35,000 to be added to their financing in order to make minor repairs or improvements.

Bargain hunters in today’s housing market typically gravitate toward REOs or poorly presented homes that are by-passed by the majority shoppers. They also generally fall into two camps: those with deep pockets making all-cash bids, and those with more limited resources seeking to get their foot in the door. Although there are programs other than the FHA’s that allow for limited down payments, the bigger hurdle is often non-compatibility between the subject property’s condition and investor guidelines. Bargains rarely begin as shining jewels and many homes require a good deal of polish to be saleable to lenders in a difficult market. At a minimum, investor guidelines require a house to be fully functional and in average condition. Scrutiny only increases with down payments lower than 20%.
REOs and other bargain homes are often in a state of disrepair or are missing items such as furnaces, kitchen stoves, etc. that institutional investors would require as a condition for financing. Banks are typically loath to direct additional funds toward a property they’ve already lost money on, even though an issue that could easily be resolved for a few hundred dollars might preclude the majority of financing options. Other defunct properties share similar problems. Fortunately, the FHA’s Streamlined(k) allows for a great range of necessary repairs or desired improvements, including:
  • Repair/Replacement of roofs, gutters and downspouts
  • Repair/Replacement/upgrade of existing HVAC systems
  • Repair/Replacement/upgrade of plumbing and electrical systems
  • Repair/Replacement of flooring 
  • Minor remodeling, such as kitchens, which does not involve structural repairs
  • Painting, both exterior and interior
  • Weatherization, including storm windows and doors, insulation, weather stripping, etc.
  • Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwave ovens
  • Accessibility improvements for persons with disabilities
  • Lead-based paint stabilization or abatement of lead-based paint hazards 
  • Repair/replace/add exterior decks, patios, porches
  • Basement finishing and remodeling, which does not involve structural repairs
  • Basement waterproofing
  • Window and door replacements and exterior wall re-siding
  • Septic system and/or well repair or replacement
The Streamlined(k) supports only those buying a primary residence and works in tandem with the FHA’s regular, insured loan program. So even those with low credit scores and limited savings can qualify. Borrowers must have the 3.5% down payment money and additional funds to cover closing costs and reserves for the implementation of the impound account.
Securing Streamlined(k) money is a bit more demanding than the regular loan process, but not terribly onerous and usually adds two to three weeks to an escrow period. Buyers need to draw up a detailed list of proposed improvements for lender approval and appraisal review. They must also provide a detailed and fully- itemized bid from a licensed and bonded contractor. Repairs costing up to $15,000 do not mandate lender inspection to verify completion of work. Those costing $15,000 to $35,000 require the lender to verify that all work has been completed. The borrower must also provide all receipts for materials and subcontracted work and proof that all contracted work has been paid for in full.
Although the Streamlined(k) program involves a bit more work, it offers great support for properties that would otherwise not meet financing requirements or for resource-poor buyers who would otherwise be left with an un-appealing, sub-standard home they couldn’t afford to improve. More program information may be found on the following HUD webpage:

Nicholas Ballard is both a mortgage broker and banker specialized in the residential Marin market.  For assistance, please call or e-mail:

Nicholas Ballard: 415-526-1941; nballard@calmtg.com
Real Estate Financing
CA Dept. of Real Estate #01356374
California Mortgage Advisors, Inc.
CA Dept. of Real Estate #01170868
Redwood Highway, San Rafael 94903

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