The FHA 203(k) Loan: How to Help Clients Buy the House of Their Dreams
Another home that just won’t sell! The home had been on the market for more than six months without a single offer. The sellers were anxious, and their agent wasn’t sure just what to do. “Remodel the kitchen and replace your countertops and cabinets,” their real estate agent instructed, trying to come up with a solution that would help the house move. Yes, the kitchen was dated, but could the stressed sellers be sure they’d select colors and styles that the perfect potential buyer would like? Luckily, the listing agent shared their dilemma with a friend who was experienced with Federal Housing Administration’s (FHA’s) 203(k) Streamlined Loan. “Have the owners pick up a few countertop and cabinet samples, and place them in the kitchen for your next showing,” the 203(k) expert said. “Post a sign that says, You Choose!” The agent and sellers followed instructions. Not only did they get a full offer, but they received several! The 203(k): Not just a rehab loan The bottom line is that buyers want choices, and the 203(k) delivers. FHA’s 203(k) loan program allows potential homebuyers to locate a great home with a shockingly good price in a wonderful neighborhood, then select their own upgrades—in addition to what may actually need to be repaired. This opportunity makes the FHA 203(k) one of the most important loan programs available. Real estate agents need to understand this valuable loan! What is a 203(k) loan? Across the nation, agents and homebuyers are finding that many properties currently on the market are in dire need of upgrades or repairs. Short sales, foreclosures and properties that have been on the market for some time make for dated, distressed and ignored inventory that needs some TLC. The ability to upgrade with new carpet, paint, cabinets and appliances immediately renders many listings more marketable. The biggest challenge is that stretched borrowers often cannot afford to remodel right away, if ever, and the owners and banks offering short sales and foreclosure inventories are unable to dedicate funds to rehab or upgrade. Basically, buyers do not have enough money to cover the cost of home purchase and take on a renovation of their recently purchased property at the same time. Great news: They don’t have to! The FHA offers a fantastic loan program, called the FHA 203(k) Renovation Loan, which was specifically designed to help borrowers purchase (or refinance), and repair, remodel or renovate the home—all at the same time, with a single loan. Don’t be misled, though, the 203(k) is not just a rehab loan. The 203(k) program allows your buyers to buy their dream home and swap out that 1980s-era kitchen they don’t have the cash to tackle. FHA’s mandate The FHA’s primary goal is to assist homebuyers with a purchase they may not otherwise be able to afford, by providing mortgages with favorable loan terms, higher loan limits and flexible downpayment options. The 203(k) Standard and Streamlined loan programs are unique because they facilitate homeownership for borrowers and properties that may not be able to qualify for a conventional loan program. The popular 203(k) Streamlined loan can be used to purchase a home or refinance an existing mortgage, and at the same time, cover the cost of a remodel or necessary upgrades, up to $35,000. Although this is a great program for first-time homebuyers, it is not a requirement under the program. Buyers don’t have to be a first-time homebuyer to obtain an FHA 203(k) loan. Basically, a 203(k) loan is just like a regular FHA loan with an added component that allows for repair, remodel and renovation. All 203(k) programs allow borrowers to finance the purchase price of the home along with the extra funds needed for repairs and closing costs. Once the purchase transaction is closed, renovation funds are held in escrow and released through a draw process to pay for pre-determined renovation work completed by approved contractors. FHA’s low downpayment requirements help borrowers obtain an affordable loan that allows them to upgrade, repair or rehabilitate a neglected or distressed property. The 203(k) loan is an important tool to increase homeownership, as well as a significant community resource for neighborhood revitalization. 203(k) and green lending The focus on environmentally conscious and green lending has been receiving a lot of attention nationwide. We are aware of the role energy improvements play in significantly lowering the cost of homeownership through lower utility bills. FHA also offers an insured Energy Efficient Mortgage (EEM), which allows homebuyers to cover some or all of the cost of qualified energy-efficient improvements in both existing homes and new construction. Not only that, an EEM can be combined with the 203(k) loan to provide additional funding for the borrower. Renovation funds and permanent financing in a single loan Most mortgage financing programs only provide permanent financing. This means lenders will not close a loan or release mortgage funds unless an appraisal demonstrates that the current condition and value of the home provides adequate security for the loan. If a property requires repair or rehabilitation, the majority of lenders will stipulate that the improvements be completed before they will offer a long-term mortgage. This means banks are not able to fund a conventional home loan until repairs are complete, and repairs can’t be made until the house has been purchased. FHA’s 203(k) renovation loan is distinctive in that it allows the borrower to purchase the home and provides additional funds to cover the costs of the proposed remodel or rehabilitation. Prior to the 203(k)’s inception, borrowers interested in a distressed property were forced to obtain separate loans to cover purchase, construction, and long-term financing. The 203(k) loan programs have filled an important void by providing affordable financing for poorly-maintained properties, such as foreclosures and short sales, and for potential homeowners who may not have the adequate funds for a conventional downpayment plus the additional rehab costs this type of distressed property often requires. Discover how you can help your real estate agents sell more homes and make more homebuyers and sellers happy. Discover the value, opportunity and potential that FHA’s 203(k) loan program provides. Ginger Bell is an education specialist who develops training programs for many companies, including Plaza Home Mortgage, Rehab Loan Network, OnlineEd and Mortgage Success Source. Formerly with Dale Carnegie Training, Bell has more than 20 years of experience leading workshops in public speaking, leadership, customer service, sales and continuing education. Bell is a Nationwide Mortgage Licensing System (NMLS)-approved instructor and has been awarded the Presidential Award by both the California Association of Mortgage Professionals (CAMP) and the Oregon Association of Mortgage Professionals (OAMP) for her commitment to bringing quality education to the mortgage industry. She may be reached by e-mail at [email protected] or visit www.go2training.com.