203(k) Rehab Loan Program: Foreclosures Present Challenges, Opportunity
The recent wave of foreclosed properties has wrought havoc upon the housing market. These properties have dragged down the prices of neighboring homes as well as increased the number of homes on the market, further depressing property values. However, there is a silver lining in this otherwise dark cloud, and that is the opportunity to take advantage of the FHA’s 203(k) mortgage loan program and the temporary suspension of the FHA anti-flipping rule. With this in mind, I thought it would be a good time to revisit the FHA 203(k) program, an existing program that is intended to allow borrowers the financial flexibility to renovate a single-family home. The 203(k) program was designed to spur neighborhood rehabilitation and revitalization and expand home ownership opportunities. It does this by allowing a borrower to take out one FHA insured mortgage to cover the cost of acquiring and fixing a property as opposed to securing separate loans for the purchase of the unimproved property, the repairs, and a permanent loan to cover the previous loans. This point came across loud and clear when I was interviewed by Cara Baruzzi of the New Haven Register for a story titled “Building a Future: 203k loan lets home buyers borrow for renovations.” But because the FHA 203(k) program can be utilized on either a refinance or a purchase, it is rapidly becoming the mortgage program of choice for borrowers in need of funds to renovate a single-family property. However, there are specific guidelines pertaining to the FHA 203(k) program that mortgage professionals and borrowers need to be aware of if they are going to be successful with this program. Eligible Improvements Under the 203(k) Program: • Roof, gutters, and downspouts • Upgrade or replace heating, ventilation and air-conditioning systems • Upgrade or replace plumbing and electrical systems • Flooring • Painting • Lead paint abatement • Remodeling, rebuilding and additions • New appliances (range or oven, microwave, trash compactor, or washer and dryer) • Improvements for accessibility for persons with disabilities • Energy-efficient improvements • Decks, patios, porches and fences • Basement finishing and waterproofing • Windows, doors and siding • Mold remediation or termite removal • Connection to public utilities • Repair or replacement of septic tanks 203(k) mortgages offer all the benefits of traditional FHA mortgages; they only require a minimal (3.5%) down payment and the credit requirements are not as strict as from traditional lending sources. Before January 2010, HUD prohibited the FHA from insuring a mortgage on a home owned for less than ninety days. In order to accelerate the sale of foreclosed properties, HUD has suspended this rule. It is important to note this is a temporary suspension and that the rule is only suspended when the sale meets the following conditions (quoted from HUD’s website): • All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction. • In cases in which the sales price of the property is 20 percent or more above the seller's acquisition cost, the waiver will only apply if the lender meets specific conditions. • The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program. The suspension of the anti-flipping rule is significant because it broadens the pool of potential buyers for those who wish to purchase and renovate a property. In combination with the 203(k) program it incentives borrowers to reduce the stock of foreclosed properties which would help property values generally. In short, if you are a looking to buy a fixer-upper or renovate your current home, now is the time to strike. The confluence of historically low current interest rates and low home values is unlikely to last much longer, and 203(k) mortgages make it easier than ever to buy or sell such a home.