get new life with
little-known HUD mortgage program
Ken Ferguson knew the house wasn't perfect. Doors,
windows, kitchen cabinets, parts of the roof -- you name it, it
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."
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
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
"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
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 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
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.
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.