Financing Investment Property

Q: I read in a column you wrote in December, 2004 that an FHA 203(k) loan might help home buyers borrow enough cash to buy and rehab the property.
 

In researching this loan, I discovered that it is only for owner-occupied homes. If you did get one of these loans and did not occupy the house, would you be committing mortgage fraud?

I would like to buy and rehab a house for resale. Do you have any other ideas regarding an “all in one” loan that would allow me to do this? We have run into nothing but lenders who want to charge us huge closing costs for both the original loan and the "home equity line" loan. Thanks!

A: The answer to your first question, I’m afraid, is yes. If you got a 203(k) loan and didn't occupy the property, you would technically be committing mortgage fraud, which is a serious offense.

However, when you get an FHA loan, you're not promising to live in the property forever. Most of these government-backed mortgages require you to live in the property for at least a year.

But there are other ways to finance the purchase and reconstruction of a property that don’t force you to break the law. There are construction loans that incorporate both the buying of the property and its renovation. But these types of mortgages tend to be specialty loans and you will pay a little more in terms of points, fees and perhaps even the interest rate.

If the lenders you're talking to are telling you that you'll have to pay big bucks for closing costs, you need to keep shopping around. You may be able to take on a higher interest rate in exchange for the elimination of all closing costs and fees (in order to minimize your upfront cash outlay) and then when you're done renovating the property you can either refinance (if you intend to rent it out) or simply sell it.

The big national lenders or local banks that portfolio their loans might have better options for you than local mortgage brokers. You might also want to try www.bankrate.com to find out the names and numbers of other lenders who do business in your neighborhood.

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