A potential solution to today’s problems of home affordability and low inventory has emerged via proposed updates to one loan program. The Federal Housing Administration’s (FHA) 203(k) Rehabilitation Mortgage Insurance Program is on the mend. Changes being considered can potentially increase borrower flexibility and eliminate burdens faced by lenders.
“At [the Department of Housing and Urban Development] HUD, we are focused on ensuring Americans can make the repairs necessary to keep their homes safe and energy efficient,” HUD Secretary Marcia L. Fudge said in her announcement of the proposals. “Thanks to the enhancements we proposed, home rehabilitation will be more accessible for millions of homebuyers and homeowners through the (FHA).”
The proposals include increasing the maximum allowable rehabilitation costs for the Limited 203(k) program from $35,000 to $50,000, or $75,000 in high-cost areas; allowing fees charged by consultants to be included in the financed mortgage amount for the Limited 203(k) program as they are in the Standard program; increasing the allowable rehabilitation period for the Standard 203(k) program from six months to 10 months (Limited from six months to seven months); increasing the allowable initial draw amount to include up to 75% of material costs (up from the current 50%); and, streamlining the program’s fee schedule for consultants.
Norcom Mortgage Senior VP of Renovation & Construction Loan Programs Charlie Napolitano told NMP that the changes are a long time coming.
"With construction costs constantly on the rise, raising the allowable Total Renovation Amount (and completion time-frames) for the 203k Limited will finally update a very old, outdated guideline," Napolitano said. "More 203k Limited transactions will mean more overall product interest (thanks to its ease of use) and more opportunity for homebuyers in a tight housing-market. Keeping the transcription as simple as possible is the key."
LOs in the know are praising the suggested updates, which they say are perhaps more important now than ever before.
This includes Jet Direct Mortgage Senior Vice President of National Renovation Lending Andy Thaw, who has been involved with the 203(k) program for the last 30 years and told NMP he is happy to see discussions regarding the changes coming to fruition.
“First, the fact alone that HUD is proposing these changes to the program which I do consider substantive, underscores the great value that the program is once again providing to homebuyers and homeowners on many levels,” Thaw said. “The 203k program affords a strong financial resource for homeowners wishing to renovate and/or expand their existing homes, and many times presents the best financial option to make that happen if not the only option."
While the Full (Standard) 203k option uses the resources of a HUD consultant during the renovation, the Limited program currently relies solely on a contractor’s estimate of costs and scope of work.
“Personally, I cannot stress the value and honestly, the importance of having a consultant as part of the transaction,” Thaw pointed out. “With the proposed changes, borrowers may now utilize the services of a HUD consultant within the Limited program and include the cost of the services within the renovation escrow. These measures will save the borrower(s) out-of-pocket expenses while offering the invaluable resources of a good, knowledgeable consultant.”
He has witnessed buyers’ frustration with the market’s low inventory and affordability challenges. Properties in need of renovations and updates have become more desirable, but current limitations to 203(k) pose a roadblock to potential borrowers.
The second big change proposed to the Limited program would raise the allowable amount of renovation escrow from its current $35,000 threshold. Although he personally prefers the Full 203(k) program with the HUD consultant, Thaw says this increase will meet the demands of higher costs since the program’s inception. He is also in favor of extending the required time of completion.
“It has been well documented over the last number of years, especially post-COVID, that supply chains have been taking longer for building materials orders … from sheetrock to flooring to windows and appliances,” Thaw explained. “Also, in many jurisdictions, with the great increase in the renovation arena nationwide, local building departments have experienced back-logs in approving project plans and permits. The extra time for completion under the 203(k) programs will be greatly appreciated.”
In terms of the amended fee structure propositions, updates are necessary to reflect current conditions, according to Thaw.
“The HUD consultant fee may be financed within the renovation escrow, (and now may be included within the Limited program as well) and the increase in the fee schedules will, in my opinion, be negligible within the context of the renovation project …. and I cannot underscore the importance of the homebuyer and/or homeowner utilizing this great resource.”
FHA is collecting feedback on the proposals on its Single Family Drafting Table web page through Jan. 5, 2024.
“The thoughtful responses we received from the industry through our February request for help in identifying barriers to program use were instrumental in the development of these proposed policy updates,” said Deputy Assistant Secretary for Single Family Housing Sarah Edelman. “We are looking forward to receiving feedback on the draft Mortgagee Letter so that we can move forward to final policy updates.”
