can i buy a distressed house with a conventional loan?

11 Replies

Hello Jacksonville fl and BP community I just want to be clear on this, 

can i get a conventional loan on a house that need mayor repairs like drywall missing cabinets ect?

@Alexander Rey

I am no pro in the lending department but it has been my experience that conventional lenders will NOT lend to you on a property that is not "livable". And that means trim, flooring, widows, kitchen, etc... It needs to be totally done.  

However you could look at. A 203k loan if you are Living in the property. 

Originally posted by @Joshua D. :

@Alexander Rey

I am no pro in the lending department but it has been my experience that conventional lenders will NOT lend to you on a property that is not "livable". And that means trim, flooring, widows, kitchen, etc... It needs to be totally done.  

However you could look at. A 203k loan if you are Living in the property. 

 Thanks Joshua that was my understanding as well but someone else came to me with this topic and i wanted to make sure, i appreciate your help and time!

Yes you can via a 203k loan and it doesn't have to be a property your living in. I used a 203k loan to purchase a 4plex that I purchased as investment only. They still require 25-30% down. The va actually has a 203k loan as well but there is only a couple of companies who do them.

Conventional loan appraisers should separate cosmetic and structural (livability) issues. Drywall damage is usually okay in small sections.  If it's large or opens to electrical and plumbing, appraisers may consider this a health and safety risk.  

It depends on the scale and type of renovation work needed. Problems that affect the "livability, soundness, or structural integrity" are what to look out for, also potential health and safety issues.

So for livability:

operational heating systems, 

operational plumbing fixtures with no major leaks, 

operational electric systems reasonably up to date (No Federal Pacific or Zinsco panel box, no aluminum wiring, etc)

Roof with no active leaks - usually with at least 5 years of estimated remaining life

For soundness/structural integrity:

No foundation issues - cracks, slanting floors, entire house leaning over, etc

No evidence of termite infestation

Health/Safety:

No mold

Peeling paint, especially in buildings built prior to 1978

There's probably more, but that's all I can think of offhand. Unfortunately I've never come across a comprehensive list online that I would send you (believe me, I've looked.)

Last December I bought a foreclosed 4-unit property in very rough shape. We shouldn't have been able to get a conventional loan, but managed to just squeak it through.

All 4 of the exterior hvac units had been stolen/vandalized. I wasn't able to negotiate for the bank to replace them before closing. I went out and bought window units with a heating component and installed them prior to appraisal, then returned them afterward. 

It worked! Then after we closed I had 4 brand new hvac systems installed.

There is a four bay open garage in the back, with one post separating two of the spaces. The post was slightly out of kilter since someone had bumped it with their car. The appraiser saw this and said the entire garage needed to be torn down. HUGE argument ensued. We had to get another appraisal. I took a 4 pound hammer and knocked the post back into place. Problem solved!

If the repairs are not major, some lenders will allow a hold back for the funds to repairs. Most missing drywall and cabinets doesn't sound all that major. I guess if ALL the drywall was missing it would be pretty major. Most won't allow a large hold back. 

There is a conventional renovation loan out there. Do a search for Fannie Mae renovation loan. There is a program called HomeStyle that works for much like a 203k. If a primary residence the allowable property types are 1-4 units. If investment, they only allow 1 unit properties. 

Also, there is no way to use a 203k fha loan on a property that you don't plan to occupy. 

Like described above, look into the FHA 203K loan, some lenders call it the homestyle loan. You can typically roll in up to $40,000 in repairs (which I have read actually boils down to low $30,000 in actual repairs due to fees and what-not). But if you move into the building, you can bring a mere 3.5% down and acquire a distressed building, put in ~$30,000 of rehab into it and if all the numbers make sense, you could have a great deal. Find a property selling for $80,000 and put in another $30,000 to bring the building up to all of the rehabbing you'd like done. End up at $110,000 all in and have the place pulling in gross rents for a total of $2400/month, you could have a nice deal.