Sometimes people need a home improvement loan because they purchase a home that needs repair, or want to purchase a home that needs repairs. The purchase of a house that needs repair is often a catch-22 situation because the bank won't lend the money to buy the house until the repairs are complete, and the repairs can't be done until the house has been purchased.

So, what are your options? There are some programs available to you through HUD. One such program is HUD's 203(k) program. This program will allow you to purchase or refinance a property plus include in the loan the cost of making the repairs and improvements. The FHA insured 203(k) loan is provided through approved mortgage lenders nationwide. It is available to persons wanting to occupy the home.

The only problem with this type of loan for some people is that this program requires a downpayment or sorts. The downpayment requirement for an owner-occupant is approximately 3% of the price of the home and 3% of the repair costs of the property.

In order to qualify for a loan using the 203(k) program you must do the following:
You, as the potential homebuyer must find a fixer-upper, then you have to get a contract of sale for it, and a feasibility analysis of the property with their real estate professional. The contract should state that the buyer is seeking a 203(k) loan and that the contract is contingent on loan approval based on additional required repairs by the FHA or the lender. The homebuyer then selects an FHA-approved 203(k) lender and arranges for a detailed proposal showing the scope of work to be done, including a detailed cost estimate on each repair or improvement of the project. Once this has been done the appraisal is performed to determine the value of the property after renovation, which is key to you getting the loan. If you, the borrower, pass the lender's credit-worthiness test, the loan closes for an amount that will cover the purchase or refinance cost of the property, the remodeling costs and the allowable closing costs. The amount of the loan will also include a contingency reserve of 10% to 20% of the total remodeling costs and is used to cover any extra work not included in the original proposal.

With this type of loan, the seller of the property is paid off at closing, for the purchase price, and the remaining funds are put in an escrow account to pay for the repairs and improvements during the rehabilitation period. You will not get this money upfront in a lump sum, it works sort of like a construction loan. Or in other words, the funds are released to the contractor during construction through a series of draw requests for completed work. To ensure completion of the job, 10% of each draw is held back; this money is paid after the lender determines their will be no liens on the property.

With this type of loan the mortgage payments and remodeling begin after the loan closes, not after the construction is complete.