Are you planning to buy an as-is house? Or, a property that may need structural repair? This type of property typically has no guarantee from the home seller regarding its physical condition. You may have your reason to buy it, but is getting a mortgage on “as-is” property easy?
If you’re contemplating buying such a house – maybe as an investment property or to customize it to fit your requirements – you’ll need to know the pros and cons of an as-is home. Basically, you need to fully understand what you’re getting into.
Buying such houses can lead to financing issues. For example, many private mortgage lenders or banks may not approve conventional mortgage loans on houses in need of extensive structural repair. The reason is that their appraised values are typically too low.
Also, keep in mind that if you buy an as-is home and later come across major problems, you’ll solely be responsible for its repairs. When you agree to buy such a house, you’re ready to accept any faults that might exist. The seller will not be required to provide a Seller’s Disclosure.
In this article, let’s understand all the repercussions of buying a house without a guarantee, and how to go about getting a mortgage on as-is property.
Buying a house “as-is” can seem like a great deal The home is cheaper since the seller isn’t making repairs You might think an as-is home is your ticket to homeownership if you have limited funds for a down payment. But before you make an offer on that as-is listing, it’s important to understand how financing works.
What Does As-Is Mean?
When a seller lists a home as-is, it means they won’t make any repairs or improvements before closing. The buyer purchases the home in its current condition. As-is doesn’t necessarily mean the home is a fixer-upper. Many sellers choose as-is just to speed up the sale.
However, as-is homes do come with increased risk. You won’t know the true condition until after closing. Then repairs are your responsibility as the buyer.
Can You Get a Mortgage on an As-Is Home?
The short answer is yes, you can get financing for an as-is home in many cases However, it depends on the type of mortgage you’re applying for
Here are some key points on financing an as-is home purchase:
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Conventional loans allow as-is purchases in some cases. Minor property defects are acceptable if they’re due to normal wear and tear. Structural issues can’t be too severe.
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FHA loans have minimum property standards the home must meet to qualify for financing. Homes needing total renovation often don’t qualify.
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USDA loans have eligibility requirements related to the safety and soundness of the property. Homes with major defects won’t be eligible.
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VA loans have strict standards for minimum property conditions. The home can’t have any major structural or safety issues.
As you can see, the property condition requirements vary by loan type. In general, homes requiring extensive repairs won’t qualify for financing. Minor issues are more acceptable.
Your lender will order an appraisal to assess the property’s value and condition. The appraiser will note any deficiencies that could impact your ability to obtain financing.
Preparing for an As-Is Purchase
If you want to buy an as-is home, take these steps to prepare:
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Get preapproved – Being preapproved shows sellers you’re ready to move fast. It also gives you a budget limit for your search.
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Inspect before buying – Never close on an as-is home without getting a professional inspection. This allows you to understand the repairs needed and associated costs.
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Check your state laws – Federal law only requires lead paint disclosure. But your state may have additional disclosure requirements for as-is sales.
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Consult a real estate agent – Experienced real estate agents can explain the implications of an as-is sale in your area. Their guidance can prove invaluable.
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Have a repair budget – Estimate your repair costs upfront so you know the true cost of the as-is home. Budget for immediate critical repairs as well as future upgrades.
Being prepared allows you to buy an as-is home with confidence. You’ll understand the property condition and your financing options before making an offer.
Financing an As-Is Purchase
While lenders will often finance as-is purchases, you may have fewer mortgage options than with a typical sale. There are however, a few common loan solutions for an as-is purchase, which include:
FHA Loans
FHA loans are popular government-backed mortgages from the Federal Housing Administration. Their low down payments and flexible credit requirements help many first-time buyers. You can use an FHA loan to buy an as-is property in some cases.
The home must meet FHA minimum property standards. This means:
- No structural issues that compromise safety
- A sound foundation
- Working plumbing and electrical systems
- Adequate water and sewer systems
If the as-is home you want requires extensive repairs, an FHA loan likely won’t work. Minor fixes are acceptable. But major electrical or structural repairs will make the property ineligible.
If repairs are needed, you’ll get a repair escrow holdback from the lender at closing. This reserve covers costs to fix FHA-required repairs after closing.
Conventional Loans
Conventional mortgages are a popular option for buyers with good credit. They come with less restrictions than government programs.
You can use a conventional loan to finance an as-is purchase in many cases. The lender allows minor defects that are due to normal wear and tear. This includes things like:
- Worn carpets or floors
- Cracked windows
- Loose cabinet doors
- Damaged walls or trim
- Missing appliances or fixtures
Structural issues can’t be too severe. They must be fixable through routine maintenance. Extensive repairs that impact safety or livability won’t be acceptable.
One advantage of conventional loans is they don’t require repairs to be completed before closing. The property must meet minimum standards at time of sale. But you can make updates after.
USDA and VA Loans
Two other common mortgage options are VA and USDA loans. VA loans help veterans and service members buy with zero down payment. USDA loans assist buyers in rural areas.
These government programs have strict eligibility standards for the property condition:
- The home must be structurally sound
- All systems must be in working order
- No major defects are allowed
- Safety issues must be addressed
In most cases, an as-is property requiring major repairs won’t qualify for a USDA or VA loan. Unless repairs are minor, these financing options will be difficult to use.
Alternatives if You Can’t Get Financing
What if you find an as-is home but it doesn’t qualify for traditional mortgage financing? You may have a few other options:
Cash purchase – Paying cash removes all property restrictions. But few buyers can afford this. With low inventory, you’ll also face fierce competition from other cash buyers.
Personal loan – Online lenders like Lightstream offer personal loans up to $100,000. Interest rates are higher than a mortgage, but could bridge the gap if repairs aren’t too expensive.
Homestyle Renovation Loan – Fannie Mae’s renovation program lets you buy and remodel in one loan. You can make up to 75% of the as-is value in repairs. It’s worth exploring if the home doesn’t meet minimum standards for other mortgages.
203(k) rehab loan – This FHA-insured program combines a purchase loan and funds to renovate. It’s an option if the as-is home you want needs extensive repairs to qualify for financing.
Seller financing – Some sellers may offer their own financing if repairs are needed. This avoids lender restrictions, but carries risk if the seller later defaults. Make sure to involve a real estate attorney to review any seller financing agreement.
With the right financing approach, you can turn that as-is listing into your dream home. Just make sure to prepare for the purchase, understand required repairs, and explore all your mortgage options.
Will you get a traditional loan on as-is property?
Unfortunately, getting a home loan, even with an excellent credit score, for an as-is house is much more difficult and complicated than securing a conventional loan such as a fixed-rate mortgage for a home that has had the required renovations and appraisals. The value of an “as-is property” is significantly lower. The loan amount will also be low to match the value of that house. Moreover, it may not take into account the expensive repairs you’ll have to make eventually. That’s why traditional loans won’t work for such types of houses.
What is an “as-is” property?
As-is, an actual legal term, refers to a house that has been listed for sale in its existing condition. Where the seller has done no renovations, repairs, or updates to prepare the house for sale. Such a property could be a foreclosure in a really bad condition, an old house that the seller wants to sell off as quickly as possible for funds, or a good property whose owner has died recently.
“As-is” absolves the previous homeowner of any implied warranty. That is to say, they cannot be held accountable for any flaws or defects after the house has been sold.
The responsibility to thoroughly inspect the property in advance falls on the buyer. That’s why it’s a good idea for a buyer to engage a professional home inspector to do a thorough home inspection to evaluate the flaws.
Selling a house as is
FAQ
What makes a house not financeable?
What does it mean to sell as is?
What happens if you buy a house and something is wrong?
Can you buy a house as is?
Fannie Mae and Freddie Mac allow properties to be purchased “as-is” when there are only minor deficiencies or deferred maintenance. The home must be safe and sound, and structural issues must be minor and due to normal wear and tear. Here are examples of the kinds of defects that are generally acceptable if you’re getting a conventional loan:
Can I buy a new home without a loan?
Talk to a lender for more information. If you’re able to get the down payment for your new home without a loan, you could consider becoming a landlord and renting out your old house. Even if the rental income isn’t quite enough to cover your full mortgage payment, lowering that monthly payment could still benefit you financially.
Can I buy a new home before selling my house?
To buy a new home before you sell your existing house, you need cash and potentially the ability to qualify for a new mortgage while carrying your current loan. For most buyers, the main question is how to raise enough cash for the down payment. Sellers in hot markets benefit from multiple offers and low, quick-moving inventory.
Do you qualify for a mortgage loan if you live in a house?
So, to qualify for most mortgage loans, a home must meet what’s known as minimum property requirements (MPRs). MPRs are standards that determine whether a house is safe to live in at the time of purchase. “As-is properties may not qualify for government-insured loans like FHA or VA ,” cautions Brook.