| Thinking about buying a fixer-upper, but worried about | | | | code. |
| coming up with the money to pay for the construction | | | | Con's |
| costs? Or are you wanting to renovate your existing | | | | The FHA 203(k) loan does not come without some |
| home but just don't have the available time or money? | | | | added costs and other potentially negative factors. |
| If so, the FHA may have a program to solve your | | | | Consumers need to carefully weigh the pros and cons |
| problems. The section 203(k) program administered by | | | | in order to decide if this program is right for them.o |
| the FHA provides funds to prospective and current | | | | Homebuyer will incur fees up and beyond the normal |
| homeowners to make repairs and/or do renovation | | | | mortgage closing costs. A supplemental origination fee |
| work. A 203(k) loan combines a home's purchase | | | | - which is the greater of $350 or 1.5% of the portion of |
| price and cost of repairs into one FHA mortgage, with | | | | the mortgage that is being used for rehab purposes - |
| only a 3.5% down payment. | | | | is required. Additionally, a fee consultant (who is HUD |
| A growing number of people are taking advantage of | | | | approved) must visit the site prior to the appraisal to |
| this program, a reflection of the large housing inventory | | | | ensure compliance with program requirements. Expect |
| caused, in large part, by foreclosures resulting from the | | | | to pay $100-$200 for this service.o Takes longer time |
| recent economic turmoil. The FHA reports that the | | | | to close on mortgage loan - up to 4 weeks longs than |
| number of 203(k) loans taken out in 2008 nearly | | | | a normal conventional mortgageo Have to use an |
| doubled from the previous year, with 2009 | | | | FHA approved lender. Though many such lenders |
| experiencing a 40% year over year increase. Potential | | | | exist- not all lenders will participate in the 203(k) |
| homebuyers, attracted by relatively low market prices | | | | program.o Some lenders may prefer to deal with a |
| on foreclosed properties, are often left to contemplate | | | | home buyer who is able to pay cash for a home |
| how (and when!) they are going to be able to pay for | | | | (versus someone using the 203(k) program) due to |
| the repairs once they purchase the house. This is not | | | | getting a quicker loan closing turnaround.o Expect more |
| an uncommon scenario as foreclosed homes, which | | | | paperwork than a normal conventional or FHA loan |
| are often left abandoned, typically need extensive | | | | Pro'so Access to funds needed to complete repairs |
| repairs. The 203(k) loan program solves this problem | | | | and/or renovationso Convenience - homebuyer does |
| by enabling homebuyers to finance the construction | | | | not have to find separate financing for construction, |
| work and start repairs on the home immediately after | | | | plus construction begins immediately after loan closingo |
| a loan closing. All residential properties, not just | | | | Speed of construction - the process of completing |
| foreclosed homes, are potential candidates for the | | | | construction work is typically quicker than if the |
| 203(k) loan program. | | | | homeowner were to conduct renovations on their |
| What is the FHA 203(k) Program? | | | | owno The 3.5% down payment - conventional |
| The FHA 203(k) program is a home rehabilitation and | | | | mortgages typically call for 10-20% down payments.o |
| repair program, designed to revitalize neighborhoods | | | | Ability to finance up to six monthly mortgage |
| and spur homeownership. It can be used by people | | | | payments. |
| who are looking to purchase a new home, or by | | | | The 203(k) Loan Process Step by Step |
| existing homeowners wanting to do repair or | | | | The 203(k) process has more paperwork and steps |
| renovation work on their current home. What | | | | than one would experience in a conventional mortgage |
| consumers end up with is a single FHA insured | | | | process. The steps are as follows: |
| mortgage - the loan amount consisting of the home's | | | | |
| purchase price (or current loan balance in the case of | | | | 1. Borrower finds a home to purchase and repair/rehab |
| an existing homeowner) plus the estimated costs of | | | | (or seeks to repair/rehab current residence) |
| the construction work. | | | | 2. Borrower and their real estate agent completes a |
| Normally, someone purchasing a home that is in need | | | | preliminary feasibility analysis to determine the extent |
| of repairs has to first obtain interim financing for the | | | | of work required, along with an approximate estimate |
| rehab repairs and then additional financing to purchase | | | | of the cost and expected market value of the home |
| the home. In this scenario - once the repairs are | | | | once all work is completed |
| complete the homeowner must then take out a new | | | | 3. Sales contract is executed |
| mortgage to combine the two loans. With the 203(k) | | | | 4. borrower selects and works with a FHA-approved |
| program, on the other hand, a borrower need only | | | | lender |
| obtain one mortgage, which covers the home | | | | 5. Borrower, contractor, and an FHA-approved |
| purchase and the property rehab. | | | | consultant meet at the property to determine |
| The 203(k) program comes in two flavors; a standard | | | | "required" vs. "desired" improvements |
| version and a streamlined version. With the standard | | | | 6. The fee consultant prepares the write-up |
| program, the construction costs must be at least | | | | 7. Home buyer enlists contractors to make bids - then |
| $35,000. The maximum construction costs are limited | | | | selects a contractor |
| only by the estimated "as-improved" value of the | | | | 8. Lender gives the construction plan to FHA-approved |
| house (i.e., the value an appraiser estimates the | | | | appraiser to determine "as-improved" value |
| property will be after repairs/renovations are | | | | 9. Lender determines maximum insurable mortgage |
| completed). All FHA mortgages, with or without a | | | | amount for the property based on the "as-improved" |
| 203(k) loan, are subject to mortgage loan limits. The | | | | property value |
| mortgage amount can range from $271,050 to | | | | 10. Loan is underwritten by lender- if approved lender |
| $729,750, dependent on where the home buyer | | | | issues a "firm commitment" and a loan closing is |
| resides. The total mortgage amount, which would | | | | scheduled |
| include any cost of repairs, cannot exceed 110% of the | | | | 11. Loan is closed. Funds are set aside in escrow |
| "as-improved" home value. The streamlined 203(k) | | | | accounts. The loan is FHA insured after loan closing |
| program is used for situations where the construction | | | | 12. The work begins. Contractors are paid in draws as |
| costs are under $35,000. | | | | FHA fee consultant approves each phase of |
| To be eligible, properties must be one to four family | | | | completed work. Homeowner has six months in which |
| structures that are at least one year old. | | | | to complete the entire work |
| Condominiums may qualify, though there are some | | | | 13. After work is completed - and the borrower states |
| added restrictions and limitations. Additionally, FHA | | | | that all work has been completed to their satisfaction, |
| allows "mixed use" properties (i.e., properties with both | | | | a HUD inspector conducts a final inspection. If the |
| residential and commercial use) to be eligible for the | | | | inspection proves OK - the lender pays the remaining |
| program. | | | | draw to the contractor. A final 10% may be held back |
| A partial list of what you could use a 203(k) loan for | | | | for up to 35 days to ensure no liens are placed on the |
| include; replace a roof, add a room, remodel kitchen or | | | | property |
| bathroom, landscaping, update appliances, repair termite | | | | It should be apparent that the FHA 203(k) program |
| or water damage, update electrical and/or HVAC | | | | offers a viable solution for some home buyers seeking |
| systems. It's also important to keep in mind that the | | | | funds for home repairs or renovation. Each individual |
| program requires certain repairs (if needed) to be | | | | needs to consider the pros and con's and apply it to |
| made. These mandatory repairs deal specifically with | | | | their own unique situation. |
| bringing the energy efficiency of the property up to | | | | |