Owners Still Have Options If They Need Money for Repairs

Finding money to fix up a home isn’t as easy as it was just a few years ago. Many home owners simply don’t have much--if any--equity in their homes to spare. And, most home buyers are pretty much tapped out by the time they close escrow on a newly purchased residence.

There are, however, quite a number of financial sources available for owners and buyers who need money for repairs and renovation.

* Lines of credit are similar to home equity loans in that both are usually in the form of a second mortgage. A line of credit uses the home as collateral for a pool of credit that can be used in much the same way as a credit card. The monthly payment is based on a percentage of the borrowers average outstanding balance. As the borrower repays principal, the borrower can continue to borrow up to the credit limit set by the lender. Most of these loans have relatively small up-front fees and terms of up to about 15 years.

* Construction financing is one option for property owners planning major work on their homes. These are usually one-year loans for projects costing more than $100,000, said Ben Hunnicutt, president of Southland Financial Network Inc. in Woodland Hills. Lenders will insist on reviewing the plans for renovation or remodeling, and funds are disbursed to contractors as work progresses, he explained. Borrowers should be prepared to pay their lender pretty hefty fees for progress inspections and plan reviews. There’s also the issue of how to permanently finance the work once it’s done. Some lenders allow the borrower to convert a construction loan into a conventional loan. Other lenders require a whole new loan.

* FHA Title 1 home-improvement loans are a good option for many borrowers who are short on equity. These government-backed loans are made through a select group of Federal Housing Administration-approved lenders. With these loans a borrower can get up to $25,000 for acceptable home improvements, and borrowers who want less than $15,000 can get it without even getting their property appraised, said Randy Collins, loan officer at American Pacific Mortgage Corp., which has offices in Woodland Hills.

“It’s a really simple loan to get,” Collins said. Title 1 lenders are generally in second position--that is, behind a superior first lender. Borrowers can use a Title 1 loan to mortgage their house up to 100%. And, “you can even get this loan the day after you buy a home,” Collins said. A borrower can get a 90% loan for the purchase of a residence and then get up to another $25,000 for repairs after escrow closes on the first trust deed.

With several points up front as a fee to the lender and interest rates of up to 14%, these are not cheap loans, however. (One point is equal to 1% of the loan amount.) “It’s not as good as a conventional second (mortgage) but it’s better than a credit card,” Collins said. Another limitation to keep in mind is that these FHA loans can’t be used on luxuries such as a pool or spa. More information about Title 1 loans is available by calling the FHA toll-free at (800) 733-4663.

* The FHA’s 203(k) program is yet another option for home owners or buyers undertaking a major renovation or remodel. These government-backed loans offer up to $151,725 for a refinancing-and-renovation package or a purchase-and-renovation package. More information is available by calling Fannie Mae at (213) 251-7030.

Buyers who don’t expect to have any money left for repair or remodeling work after they’ve closed escrow on a purchase have several options, said Shelly Klimusko, senior loan officer at Metrociti Mortgage Corp. in Encino.

* Sellers can be asked to do needed work as part of a sales contract, Klimusko said. In some cases there’s no other option but to ask the seller to perform certain work on a house, she said. For example, “most lenders won’t lend until a roof is water-tight,” she said. “If you try to apply for a mortgage on a home that needs major repairs, almost no lender will let the loan close until the work is finished. They want to be sure there are no health and safety code violations by the time escrow closes.”

* A refund of non-recurring closing costs is another option for some buyers, Klimusko said. Buyers can specify in their sales contract that they want up to 6% of the purchase price refunded by the seller for so-called non-recurring closing costs. This money can be used to pay closing costs, and in some cases other expenses too. Not all lenders are keen about such agreements, however, so borrowers should check with a lender or mortgage broker before they place such a clause into their purchase contract, Klimusko advised.

Either of these two options involving the seller “obviously complicates the deal,” said Hunnicutt of Southland Financial Network Inc. “You need a patient seller,” he said. “But, lots of sellers are having problems selling properties today and they are more likely to be flexible.”