Q: I just bought my first home. Like most of the homes I saw in my price range, it definitely needs cosmetic fixing to really make it livable — paint, carpet and tile, and some sprucing up in the kitchen and bathroom. (It was a foreclosure, so some of the cabinet doors are missing, etc.) Honestly, I used almost every dollar of my savings just to buy the home, so I didn’t have any money left over for repairs. I thought I’d be able to go get an equity line and finance the work that way, but have been turned down by the bank. They said there’s no equity in my home to borrow against. What did I do wrong, and do you have any suggestions?
A: The reality that is dawning on you is one that hits almost every seasoned house hunter at the entry-level price range these days: Close of escrow is actually going to be the beginning, not the end, of your homebuying adventure. Many of the REO and short-sale properties on the market "need TLC," to put it in classically euphemistic real estate parlance. Fortunately, though, there are some other sources of repair money you should know about.
In terms of what you did "wrong," your job as a smart homebuyer was to get clear on the level of TLC you feel you would need to put into the property to make it work for you — before you remove your contingencies and, ideally, even before you make an offer, so you can take those costs into account. Ideally, you would have gotten a clear understanding of the work that needs to be done (per your home inspectors, who generally don’t call out cosmetic issues), the work that you needed to be done for your own comfort and where the money would come from to do all of the repairs early on in the transaction.
Ideally, you would have asked your inspectors to help you distinguish wants from needs and prioritize your repairs and upgrade list in order of urgency. And, of course, you would have approached the whole matter of repairs — during escrow — with the understanding that most homeowners keep a running (read: never-ending) list of wanted and needed upgrades throughout the time they own a home.
Here’s the rethink — because of the ubiquitous funding and home condition issues of today’s market, finding the funds for repairs cannot be an afterthought to your house hunt, where you try to figure out where you’ll get the money after you pick the house. Rather, smart buyers now must get educated and clear about where repair monies will come from before you pick a home, so they can know what level of disrepair is acceptable when viewing a home, and what level should turn them right back around through the door without any ado.
As you now know, it is much less feasible on today’s mortgage market than it was a few years ago to buy a home and quickly turn around and borrow money against your home’s equity to upgrade or repair the place. This is the credit crunch at work, almost by definition. Also, while many regions are starting to see the first uptick in home prices in several years, the mortgage world will take some time to catch up — for now, most lenders are still operating on an assumption that if you just bought a home, it’s value is likely the same as or lower than what you paid for it. Accordingly, unless you put down a hefty down payment,
So, where else can you look for funds? A number of places. I have buyer clients with excellent credit who are taking out personal loans with their bank or credit unions to do repairs. Others are using zero-interest credit cards or financing, both from banks and directly from home improvement stores — this is great for relatively small repair costs, but you certainly need to be clear up front on what the interest rate will be after the typical yearlong free-money period, and make a plan to pay the balance down or off while there is no interest.
Depending on the types of repairs, upgrades, location of your home and the availability of programs in your area, there are a number of government sources of funding for home repairs. If your place needs seismic upgrades, sewer line repairs, new windows, was what your town deems a "blighted" home or is located in a designated redevelopment area, your city or state government might offer some financial support for the work you need done, either up front or in rebate or property tax credit form. …CONTINUED
And while banks are not allowing low-equity homeowners to borrow repair funds right after closing, there are a number of refinance loan programs that are designed to allow buyers to estimate their repairs during escrow and roll the purchase and repair costs together so that the repair monies are available at closing. The primary example of this is the FHA 203K loan program. While this sounds like a match made in heaven, I’d urge you to refrain from getting excited about this possibility unless and until you find a mortgage broker and/or lender who can actually close these loan programs. Many banks claim to offer it, but the reality of their underwriting guidelines makes it virtually impossible to close.
On the other hand, perhaps the most feasible and frequent source from which my own buyer clients are obtaining home improvement funds these days is the first-time homebuyer tax credit. While some buyers are making a strategic financial decision — which I applaud — to tuck away the $8,000 in their savings account for a rainy day, others see it as just as strategic to use some or all of those funds for their repairs, and thus avoid using high-interest-rate credit cards to fund the needed TLC.
If you close escrow by Dec. 1, 2009, you can actually file an amended 2008 tax return and get your first-time homebuyer tax credit very soon after closing.
Action Plan
1. Talk with your tax adviser now to determine whether you are eligible for the first-time homebuyer tax credit and, if so, at what amount.
2. Review your inspection reports, and get a clear idea of which repairs are high priorities and which could wait.
3. Once you have your needed repair list, obtain multiple bids from contractors referred by your family, friends or real estate agent to get a grasp on how much money you’ll need to get the place into livable condition.
4. Make sure you get clarity on whether you’ll be able to handle the needed level of repairs before your contingency or objection period expires — and don’t be afraid to keep house hunting if a particular property would put you in over your head.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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