While the government explores new ways to rent foreclosures and jump-start loan modifications to solve the housing bust, a little-known and underused Federal Housing Administration program is quietly helping buyers purchase foreclosures by wrapping the cost of repairs into their mortgage loan.
The FHA's stealth program, known officially as the 203(k) Rehabilitation Home Mortgage Insurance Program, comes to the rescue of buyers caught in a common Catch-22 while trying to purchase a foreclosure.
Here's the typical scenario: The Smiths find a foreclosure in a neighborhood they love. Unfortunately, like many foreclosures, the previous owners have stripped out the kitchen, bathrooms and most of the light fixtures. The Smiths can't afford the $50,000 out of pocket for repairs, and their bank won't approve their loan until the repairs are completed.
Enter the FHA. Under the 203(k) plan, the government backs the loan with the additional money for renovations and repair built into the loan amount. Program loans require only a 3.5 percent down payment, along with an upfront mortgage insurance payment of 1.75 percent of the loan amount that can be folded into the loan.
You must still find a lender who uses the program and meet their credit and income requirements, but with the FHA backing, those requirements will be lower than conventional loans.
Naturally, there are restrictions. You'll need to submit three bids from licensed contractors to a HUD number-cruncher for approval. Repair work must begin within 30 days of closing and be completed within six weeks. HUD holds the repair money in escrow following closing and only releases it upon inspection as the repairs are completed.
Oh yes, and you must occupy the house; flippers and investors need not apply.
Although it's been around forever, the 203k has received renewed interest since the housing bubble burst. Nationally, the number of 203k loans has jumped from 2,929 in 2006 to 22,476 in 2010.
So why haven't real estate agents been advertising this stealth foreclosure fix? Simple: the closings can take up to 90 days, twice as long as most conventional loans, and there's extra time, inspections and paperwork involved.
Clearing the number of foreclosures that resulted from this historic housing bust is going to take new solutions.
But where's the love for the solutions we already have?
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