203k Loans Make Purchasing a Home Within Reach for Many

Posted on | July 18, 2009 | Written by: Diane Donnelly

In partnership with state and local housing agencies and nonprofit organizations, many lenders offer a loan program called the 203K, to rehabilitate properties. It is Housing and Urban Development’s (HUD) commitment to increase homeownership and promote, restore and preserve the existing housing supply.

When a buyer wants to purchase a home in need of repair or updating, they usually have to obtain financing to purchase the home then utilize his own personal money or secure additional financing to rehab the home. The additional financing, often a Home Equity Line of Credit (HELOC) generally carries higher interest rates and shorter amortization periods (length of time the money will be loaned). These conditions make a home in disrepair unattractive to buyers as well as cost prohibitive. In an effort to find financing options to meet the growing demand for revitalization of these homes, the 203K loan program was designed to address this growing problem.

The 203k loan allows a buyer to finance the cost of the rehabilitation based on the projected value of the home when the work is completed.

What type of home is eligible?

One to four unit dwelling that has been completed for at lease one year.
Homes that have been demolished providing some of the existing foundation remains in place
An existing home or modular unit can be moved onto the property after foundation has been inspected.
Condo units that have been approved by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) or meet Fannie Mae (FNMA) guidelines. (Other restrictions apply for condo rehabilitation - contact your FHA approved lender.

What type of improvements are allowed?

Painting, room additions, decks and other items. All health, safety and energy conservation items must be addressed prior to completing general home improvements.

Required Improvements

All rehab construction and/or additions financed with 203k mortgage money must comply with the following:
Must conform with local codes and HUD minimum standards.
To improve the thermal efficiency of the home, the following are required:
Weatherstrip all doors and windows to reduce infiltration of air
Caulk or seal all openings, cracks or joints in the building envelope
Insulate all openings in exterior walls where the cavity has been exposed as a result of the rehab. Insulate ceilings where necessary.
Ventilate attic and crawl space areas.
Heating, ventilation and AC supply and return pipes and ducts must be insulated whenever they run through unconditioned spaces.
Heating systems, burners, and AC systems must be sized no greater than 15 percent for the design.
Each sleeping area must be provided with a minimum of 1 approved, listed and labeled smoke detector installed adjacent to the sleeping area.

The above guidelines are a sample of what would be expected. Please contact your FHA approved lender for a detailed account of all conditions and stipulations.

How will you know what the value of the home is now and what it will be after the repairs are complete?

There will either be one or two appraisals depending on the scope of the work and the complexities of the project. The appraiser will offer the after improved value (the expected market value of the property after completion).

What will I need to provide if I elect to do a 203k loan?

You will be required to show a plot plan if you are adding to the structure. You will need to show where structural or planning changes are being considered. Finally you will need to provide a cost estimate and description of the work to be done. The estimate must include labor and materials.

Are there any reserves held by the mortgage company?

Yes, there are several. Please seek guidance from your FHA approved lender. One reserve is the mortgage payment reserve. Here, six months of mortgage payments can be included in the rehab costs to assist the borrower while the home is uninhabitable.

Maximum mortgage amount

The maximum mortgage amount is based on the lesser of 1) the as is value or the purchase price of the property before rehabilitation, whichever is less, plus the estimated cost of rehab OR
110 percent of the after improved value of the property.

What is the process to secure an FHA 203k loan?

Locate the property
Have a preliminary feasibilty analysis done. That is, to determine the extent of the rehab work required, a rough cost estimate of the work, and the expected market value of the property after completion of the work.
Sign a sales contract
Select an FHA insured mortgage lender
Prepare the cost estimate - a consultant can help the buyer prepare teh exhibits to speed up the process.
Obtain the case number (lender to do this step), the plan reviewer, appraiser and the inspector.
Fee consultant visits the property with the buyer and the contractor to ensure the architectrual exhibits are acceptable and the program requrements have been shown property on the exhibits.
Appraiser performs the appraisal
Lender reviews the application
Lender issues a conditional commitment and establishes the maximum insurable mortgage amount of the property.
Lender prepares firm commitment application. the buyer provides information for the lender to pull a credit report, verify employment and assests, etc.
Lender issues a firm commitment when the lender assesses the risk of the buyer to be within guidelines.
Loan closes
Mortgage insurance is endoresed.
Rehab begins - buyer has 6 months to complete work.
releases from the rehab escrow account begins when the wokr is inspected by a HUD approved inspector. A maximum of four draw inspections plus a final inspection are allowed. Additonal draws can be authorized if the work exceeds $10,000.
Final inspection. The HUD approved inspector approves all work and the final draw is released, minus the 10 percent holdback.

This is just an overview of the FHA 203k loan. There are other conditions that apply and must be discussed with the lender chosen to finance the loan.

The program is a great option for people seeking a home that may be deemed “undervalued” because of the distressed condition of the home. With a little determination and appropriate guidance, this loan will help a buyer who may otherwise not be able to purchase a home due to the costs associated with trying to secure two loans.

If you enjoyed this blog and would like to continue to receive my blogs automatically, please subscribe to the RSS feed on my blog page.

Live Well!

Share and Enjoy: