mortgage

Home-rehab dream ruined? Try an FHA loan

Hordes of hopeful homebuyers dream of buying a foreclosure at a rock-bottom price, fixing it up and living happily ever after.

The dream heads south, however, when many of them realize they don't have the cash needed or learn that available financing won't cover the extensive repairs.

A longtime FHA program and a more recent streamlined version of it can make those dreams come true.

"The problem is, many homes have damage or have been stripped down," says mortgage broker Dave Vance, president of Lifetime Financial Partners in Bloomingdale, Ill. "In those cases, the home is not eligible for traditional financing."

"Most banks sell (foreclosed) homes as-is and will do no repairs whatsoever," explains Leslie Mosier, a Seattle-based ZipRealty agent.

Mortgage financing plans typically provide only permanent financing, with the lender not closing the loan until the condition and value of the property provide adequate loan security, according to the Federal Housing Administration, part of the Department of Housing and Urban Development. When a rehab is involved, the lender typically requires improvements to be complete before a long-term mortgage is made.

So what's a buyer to do? Some look to the FHA's 203(k) loan program.

Through a 203(k), a buyer can obtain the money to acquire a property and have it repaired in a single transaction, says Gerry Glavey, director of the processing and underwriting division of HUD's Philadelphia Homeownership Center. "Money for rehab work is set aside, placed in escrow, at the time of closing."

Two options

The original program, or standard 203(k), starts with the homebuyer choosing a lender from an FHA list. The lender selects an FHA-approved consultant, who develops a description of needed work to the property. Then an appraiser determines the repaired property's value.

The work should be completed within six months, and after a final inspection, all parties sign off that the program is complete. In effect since the 1970s, standard 203(k) loans have no limit on the amount of repairs, although the maximum mortgage amount must meet certain loan-to-value ratios and cannot exceed 110 percent of the final (after-improved) value of the property.  

Since 2005, buyers have had another option, the streamlined 203(k), which eliminates the need for a consultant. The borrower obtains contractor bids for the repairs, which can total up to $35,000. "We're doing a lot of streamlined 203(k)s," says Glavey. In the 16 states under his center's domain, 727 203(k) loans were insured in January of this year, 534 of which were the streamlined version.

A few years back, the subprime lenders with products such as no-doc loans ruled, and buyers didn't look to programs like the 203(k). "We never changed our credit standards like they did. Now those folks are gone -- we're still here. We've always been self-supporting with mortgage insurance premiums," says Glavey. Now, conventional lenders have needed to get strict, but the FHA hasn't changed, other than raising the minimum investment from 3 percent to 3.5 percent.

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