Did you know that you can purchase a property and include up to $35,000 in rehabilitation costs in the loan through an FHA 203K program? This program is designed to give homebuyers and homeowners the opportunity to improve their homes including making them more energy efficient. The streamlined 203K program is intended to facilitate uncomplicated rehabilitation and/or improvements to a home for which plans, consultants, engineers and/or architects are not required. Some of the common repairs that you can utilize this program for are: repair/replacement of roofs, repair, replace or upgrade HVAC systems, remodeling kitchens, interior and exterior painting, weatherization and the purchase and installation of appliances.

The FHA 203K loan is an important tool for community and neighborhood revitalization and for expanding homeownership opportunities.

The 203K program will allow you to repair, replace or add exterior decks, patios, or porches.

You can utilize the 203K program to make accessibility improvements for persons with disabilities.

Along with EEM (Energy Efficient Mortgage) you can remodel your home to make it more energy efficient. These upgrades include storm windows and doors, insulation and weather stripping.

Given the need for homeowners to make minor repairs without exhausting personal savings, and in consideration of the increasing cost of materials, the minimum repair cost of $5,000 has been eliminated and the ceiling is now raised to $35,000.

The streamlined(K) program is also available for mortgage refinance transactions including those where the property is owned free-and-clear.

On 203K loans that do not exceed $15,000 in repair costs, the lender is not required to perform or have others perform inspections of the completed work.

Don’t overlook a good property that only needs some tender love and care to make it in to everything you would desire a house to be. The 203K program gives homeowner’s and homebuyer’s the opportunity to take a good house and make it great.

Many lenders have successfully used the Section 203(k) program in partnership with state and local housing agencies and nonprofit organizations to rehabilitate properties. These lenders, along with state and local government agencies, have found ways to combine Section 203(k) with other financial resources, such as HUD’s HOME, HOPE, and Community Development Block Grant Programs, to assist borrowers. Several state housing finance agencies have designed programs, specifically for use with Section 203(k) and some lenders have also used the expertise of local housing agencies and nonprofit organizations to help manage the rehabilitation processing.

Whether it is that fantastic foreclosure deal, adding that new deck, getting rid of that shag carpet, saving the purchase deal that the bank turned down due to property condition or making that simple change that turns an ordinary home into your dream home; FHA 203K can help you.

Most mortgage financing plans provide only permanent financing. That is, the lender will not usually close the loan and release the mortgage proceeds unless the condition and value of the property provide adequate loan security. When rehabilitation is involved, this means that a lender typically requires the improvements to be finished before a long-term mortgage is made. In the current market many of the numerous foreclosures sit on the market in disrepair due to vandals, theft and neglect. To lenders of traditional loans those properties are considered poor collateral that they’d prefer not to lend on. However, for FHA 203K loans the loan is based on after repair value and includes an escrow account to complete the repairs needed to bring the house to a condition that lenders prefer. That means that the current condition of the property is not as important on 203K rehab loan as the condition of the property once the 203K renovation is complete. This provides an outlet to purchase dilapidated properties, many of which have spent extended periods on the market due to the lack of availability to traditional financing, and solves the problem that most lenders face when dealing with property in disrepair. What this means to the home buyer is generally a significant discount to “as-is” value and, quite often, a fantastic deal on a house.

The easiest and quickest version is the FHA 203K Streamline. This loan is for repairs under $35,000 that do not involve any kind of structural renovations. For Streamline FHA 203K’s you will have two draws. Generally, the lender will release 35-50% upfront and 50% when the work is completed. On most of these the lender will require a final inspection to make sure the work is complete, but on some of the simpler 203K rehabs you can provide receipts showing materials have been purchased and that will be sufficient.

www.203Kloan.net is where I received the last 3 paragraphs. Let me know if you need more.

The FHA 203k Rehabilitation Loan- The Players

 In this second installment I will describe the various participants in the 203k program and how they interact.  Understanding the role each player has is critical to ensuring the success of renovation process.

 The first and obviously most important player is the borrower. Note that I do not say home buyer, this is because the FHA 203k mortgage can be used by an existing home owner for a refinancing of their existing home not just for a buyer purchasing a home outright.

The home buyer who is looking to use the FHA 203k loan may have made this decision because they see possibilities in a potential home that they believe they can realize to make the home their ideal “dream house”. Or, they might be required to select this loan program to address deficiencies in the property identified by the appraisal that the seller of the property is unwilling or unable to correct. Either way, the home buyer must understand and take into consideration two important elements in their efforts to qualify for a 203k loan:

• How much money does the home buyer qualify for? It is necessary that he/she is able to afford the purchase price of the home plus the cost of the repairs and other incidental costs (draw fees, title update fees). The buyer needs to take into account the fact that there will be a mandatory minimum 10% contingency added to the repair amount. This contingency reserve is money added to the escrow amount to be used to effect repairs that are needed to completed the scheduled repairs- emergency corrections and unforeseen problems are remedied using the contingency. In some cases, the consultant may increase the contingency to as much as 20% if there are risk factors that make the likelihood of having expensive unforeseen problems arise after settlement. This is usually done when some or all of the utilities were off prior to the close of escrow and it is believed that there may be hidden problems with these major system. More about the contingency and it’s usage in Part III The Possibilities.

For example: If the purchase price of the home is $150,000 and the expected repair amount is $40,000 then there will be an additional $4,000 escrowed for a contingency reserve, making the total cost of the loan approximately $195,000 (not 194K because other fees would be included)

• The second factor the buyer must take into consideration is the ARV (After Repaired Value) as mentioned in Part I The Process. The home must be able to appraise for the new value – in our example $195,000…actually the home can under appraise by 10%. In other words, the loan can exceed appraisable values of comparable homes in the area (“Comps”) by 110%. This would mean that with our example the comps that the appraiser could use to determine value can be as low at $177,250.00. This allowance is made because of the mandatory 10% contingency and because FHA is aware that it often costs more to bring a property up to current standards.

The other type of borrower is the existing homeowner looking to refinance their property and make improvements or upgrade existing elements.  This borrower and their must meet the same qualifying guidelines as a new home buyer but there is one important additional requirement that has been causing a lot of refinance clients grief- the residency requirement.

Simply stated- a person looking to refinance a home using an FHA 203k mortgage must be actively living in the home at the time of the consultation and for the 6 months that precede the inspection. The must show proof that they are living in the home- utility bills, critical mail being delivered to the address; government ID (driver’s license, etc) using the property address. The utilities must be on at the property and the home must show habitability.

This is becoming a problem for homeowners who started renovating a home before applying for the 203k and have made the house un-inhabitable in the process. Living somewhere else- albeit temporarily- the government will not approve this borrower for a refinance loan.  Why?

As the FHA 203k mortgage was designed to help owner-occupied buyers repair their homes, it was judged that the risk that the loan would be used on investment properties was greatest when the homeowner was not actively living in the home at the time of the mortgage request.

In my experiences working with existing homeowners, I have suggested they make a few necessary rooms habitable for a few months and then reapply. I also encouraged the borrower to get all their information changed to the address that the loan will be on and to start getting services and activities begun at the home in question.

Both the new (not “new” constructed home- as FHA prohibits using a 203k loan to repair a newly constructed home that has never been inhabited) homebuyer and the refinance borrower will be the decision maker for all custom items selected for the renovations. They will decide with the help of their consultant and contractor what type of components will be placed in the home (colors, styles, and materials) making sure the cost parameters do not exceed allowable funds. This is the fun part and to me the most attractive component of the 203k rehab loan-the ability for the borrower to make the home exactly the way they want it to be – and if that means Pepto Pink in the middle bedroom with Hunter Green carpeting – then that is what will be in the room.

More about the other players to come.

Catherine L. Hall (the “203k Queen”) is the author and creator of the 203k in a box consultant certification and training system.  She has owned and operated Value Home Inspections since 1993 and for more than 7 years was the only certified female home inspector in Pennsylvania. Ms. Hall has been a practicing FHA 203k Consultant since 1999 and has completed over 500 consultations in addition to having performed over 3000 home inspections.  Ms. Hall has certification as a FEMA Disaster Relief Inspector, REAC Contract inspector, PA DEP Lead Risk Assessor, PA DEP Radon Measurement Technician, and PA DEP Licensed Pest Control Operator. Information provided in this article is not intended to be legal advice and is informational only.

With homes prices down, many people that couldn’t afford to purchase a home a few years ago can now. One of the challenges my clients and I are running into is a good majority of the homes in the $100,000 – $150,000 price range need a lot of work. When you can only afford to spend $125,000 on a home, chances are you don’t have an extra $10,000 in the bank to pay for the improvements that are necessary. Fortunately, the FHA 203k loan can help with this. 

Dave Woodland with Signet Mortgage in Bend shared some of the details of this loan. With a down payment as low as 3.5%, a home buyer can finance the cost of the improvements into a 30-year fixed rate home loan. The mortgage amount is based on the projected value of the property after the work is completed. The improvements can be major, like a kitchen or bathroom remodel, new roof, or can be used for appliances or cosmetic fixes like painting. You can hire a contractor to do the work or tackle it yourself if it’s determined that you are qualified. 

I can’t tell you how many homes I’ve seen lately that have been stripped of appliances and fixtures, vandalized, or could be great properties with a little (or a lot) of TLC. This is a wonderful loan program for those properties. If you’d like to take advantage of this loan program, Dave has the details. Send him an email dave@signetmortgage.com or give him a call at 541-318-0888. If you’d like a list of properties that could use a little love, please contact me at csmith@total-property.com or 541-788-8997.