Feds Try Creative Home Mortgage Loans to Sell Foreclosed Houses

Creative financing got a bad name back in the heady days of the real estate boom, when anyone with a pulse could qualify for a loan. But with a rising glut of unsold homes on the market, the government is pushing some creative loans it hopes can help spur sales.

Conventional loans are harder to get and have tighter rules. For example, if a home needs significant repairs, a conventional loan will require that those repairs be made prior to settlement.

In the case of foreclosures, this presents something of a problem since the banks that own the property are generally unwilling to spend any money on repairs, insisting that the home be purchased "as is." If the prospective buyer can't get a conventional loan, what other options do they have?

The Federal Housing Administration (FHA) offers something called the FHA 203k loan, which is tailor-made for a foreclosure purchase where repairs are needed. Sometimes called a "rehab" loan, the 203k is actually two loans in one.

Two loans in one

The buyer receives financing for the purchase price of the house, and a second amount for the estimated cost of repairs, identified by an FHA appraiser. The second amount is held in escrow while the sale proceeds to settlement.

After settlement, the repair work is paid for with the escrow fund. The homebuyer pays one mortgage that includes the financed portion of the purchase price and the cost of the repairs.

This loan is only available to buyers who plan to make the property their primary residence. It cannot be used to finance second homes or investment property.

The loan takes longer to close than a conventional loan and has higher costs. Its interest rates, however, are fairly competitive, based on the buyer's credit score.

For foreclosures only

Fannie Mae, meanwhile, has a loan program especially for financing properties that it has repossessed. It's called the HomePath Mortgage, but is available only on eligible property.

The benefits include:

Low down payment and flexible mortgage terms (fixed-rate, adjustable-rate, or interest-only)

You may qualify even if your credit is less than perfect

Available to both owner occupiers and investors

Down payment (at least 3 percent) can be funded by your own savings; a gift; a grant; or a loan from a nonprofit organization, state or local government, or employer

No mortgage insurance

No appraisal fees

Also eligible for HomePath Renovation Mortgage

HomePath Mortgage financing is available from a variety of lenders - both local and national.

"More than 87,000 families have purchased HomePath properties in the first half of 2010 - nearly double the number of Fannie Mae foreclosed properties sold in the first half of 2009," said Terry Edwards, executive vice president of Fannie Mae's Credit Portfolio Management. "We continue to look for ways to stabilize neighborhoods and offer incentives to qualified buyers who will occupy these properties over the long term and help support their communities."

Fannie Mae is even offering a special incentive to qualified home buyers who will be owner-occupants. If they close before December 31, 2010, they can receive up to 3.5 percent of the final sales price that can be used toward closing-cost assistance. In addition, selling agents representing owner-occupants will receive a $1,500 bonus.

As in the case with the FHA 203k loan, rates for Home Path loans are competitive, based on credit score.