Ken Ferguson knew the house wasn't perfect. Doors, windows, kitchen cabinets, parts of the roof -- you name it, it needed fixing.

Yet some 14 months after the 53-year-old nursing home maintenance supervisor moved in, he still deems his buying experience "too good to be true," thanks to the Department of Housing and Urban Development's 203k loan program. It allows people to rehabilitate homes by obtaining a mortgage that covers the purchase price of a property, the cost of renovating it and the monthly mortgage payments due before move-in day.

"I didn't know a thing about them, but it was explained to me what it consisted of -- the mortgage company actually furnished the monies to do repairs on the property -- and it worked out great for me," says Ferguson, who has been living in his Port St. Lucie, Fla. home since Thanksgiving of 1997.

"I would recommend it to anybody."

Few borrowers
One of many mortgages offered through HUD's Federal Housing Administration, 203ks have been part of the industry landscape since 1961. But with little lender participation for years, only a relative handful of borrowers got 203ks during the past three decades. In the meantime, other government-backed mortgages, such as the more popular "VA loans" offered through the Department of Veterans Affairs, gained wide acceptance.

Things started to change in the mid-1990s, however, as the nation's stock of homes continued to age and lenders increasingly sought to gain an edge in a crowded mortgage marketplace. The process gained momentum in 1994 after the government huddled with industry experts, employees and nonprofit organizations to figure out what could be done to increase the program's appeal and ease of use for the average consumer.

The resulting loan modifications spawned record numbers of 203ks getting done over the past four years, including 14,205 mortgages worth $1.34 billion in fiscal 1998, according to HUD spokesman Lemar Wooley.

"I've been doing them for 16 years, and right now with my company, it's one of their primary products," says Pat Porter, director of rehab lending for CrossLand Mortgage Corp. part of Salt Lake City-based First Security Corp. CrossLand handled about 15 percent, or 2,000, of the 203k loans closed in 1998, as well as Ferguson's mortgage, according to HUD and company data.

Long process made faster
"When we first started doing the loans, it took six to eight months to close and nobody wanted to get involved with anything that took so long -- buyers, sellers or Realtors," Porter says. Now, "We have it down to where they typically close in about 45 days. We do a lot of first-time home buyers, and with the move back to the cities, since a lot of areas are expensive, we are finding that a lot of those are for buyers that are buying back into the city area."

Essentially a hybrid construction/permanent loan, 203ks usually find borrowers, rather than the other way around; somebody sees a place that needs work, but doesn't know about the financing option until a real estate agent suggests it. Borrowers then locate a lender that offers 203k loans either by asking around or searching online at HUD's Web site.

At this point, customer and lender start working on the standard pre-qualification process, identifying credit, income information and the like. They also pick a HUD-trained "rehabilitation consultant," says Theresa Hagman, first vice president of construction and rehabilitation lending with Countrywide Credit Industries Inc.

This Adviser, who more than likely will be a general contractor or appraiser who has worked for lenders in the past, surveys the property to determine what work needs to be completed, how long it will take and how much it will increase the value of the home.

Financial calculations
The lender uses the resulting work write-up to calculate the size of the borrower's mortgage. The loan can't be for more than the current value of the home plus the cost of rehabilitation, or 110 percent of the expected market value of the completed home. If someone wanted to buy an $80,000 home and do $20,000 worth of work, for instance, the loan likely would be for $97,000.

After closing, the lender holds the rehab money in an escrow account, releasing payments as either the borrower or an outside contractor meets specified performance benchmarks. The same 203k consultant who handled the original work order, or another hired by the lender, has to sign off on each disbursement.

"This product is good for everybody," Hagman says. "You have somebody there before you even buy the home to give you some insight and you have someone who's HUD approved to come out and look."

As with any restricted mortgage, 203ks have associated costs and requirements. Like traditional Federal Housing Administration loans, they're subject to government limits that restrict the overall amount a person can borrow. HUD's Web site shows the current national cap, as well as which counties feature higher limits.

The rates on 203ks usually exceed regular FHA rates by about 1 percentage point, too, because lenders perceive them as somewhat riskier. Then, there's the cost of HUD's "sponsorship" of the loan program.

Protecting the lenders
Consider that the agency doesn't offer 203k loans directly. Instead, it acts in the role of a private mortgage insurance company in a conventional deal -- offering to take possession of a home or cover a lender's loss in the event a borrower defaults. This guarantee makes lenders comfortable with offering 203ks and accepting as little as 3 percent down on them from borrowers.

But the government needs to be able to pay for its insurance plan. So customers pay one-half of one percent, or 0.005, of their loan amount in monthly installments to help foot the bill. That's in addition to the consultant's fees, which can amount to a couple hundred dollars during the closing and escrow period. HUD offers information about other stipulations at its Web site.

Lenders say the benefits of financing improvements through a 203k loan outweigh the costs of getting one, however.

"It's a much bigger burden to buy a newer home and have things break over time ... than to have a rehabilitation consultant come in and say, 'These things might become an issue,' " Hagman says.