Increasing the value of underwater homes.
Many homes can’t be sold in a conventional manner because there is no equity in them to pay for closing costs. These homes are usually referred to as underwater homes.
A solution to underwater homes lies in selling them to a purchasers who uses a renovation-purchase loans. The reason for this is that the appraisal guidelines for a renovation-purchase loan, is based on the “after improved” value of a home. This is instead of the “as-is” value, as is traditional for all other types of purchase loans.
A FHA 203K renovation-purchase loan can be for as much as 110% of the after improved value of the home – usually the purchase price plus the improvements. This guideline alone creates a small amount of “equity” that can allow a seller to pass most of the closing costs onto a buyer, who can include it into the purchase loan.
The solution is enhanced by improving the home with green energy efficient features and appliances that reduce the cost of home ownership by reducing energy costs. FHA guidelines allow a buyer to add an additional amount to a purchase loan without the borrower having to qualify for it. This is on condition that a professional HERS (Home Energy Rating Services) rating shows that the cost of the energy improvements is less than the energy savings over the life of the loan.
Alternatively, FHA guidelines allow the lender to stretch homeownership and total debt qualifying ratios. The home ownership ratio can be stretched from 29% to 33% and the total debt ratio from 41% to 44%. Compared to conventional purchase loan ratios of only 28% and 36%, these higher ratios allow borrowers to qualify for a significantly higher loan amount.
For the buyer, an Energy Efficient Mortgage enhancement offers all benefits:
• No additional down payment required.
• An automatic qualification.
• A generous limit of 5% of home value.
• Appraisals are automatically increased.
• An additional allowance is allowed for solar energy improvements.
• The result is always a positive cash flow for the buyer/borrower.
In conclusion, although there is a generous limit to the additional amount that can be borrowed, the value of homes that are made more energy efficient are in most cases increased. This, plus the additional ability of buyers to finance their purchase, makes it easier for underwater homes to be sold.
Hopefully, the above information has been helpful to you.
Other posts about financing that will also be useful to you are:
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Marius J Smook – Licensed Real Estate Eco-Broker, LEED AP for HOMES, Home Energy Rater.