The foreclosure crisis has started to let the cat out of the bag on “the best kept secret in real estate”: the Federal Housing Administration’s (FHA) 203k rehabilitation loan.
The 203k program allows homebuyers to take out a mortgage for more than the value of the home for necessary repairs, as determined by a consultant or contractor – giving them instant equity.
With a glut of distressed and abandoned properties on the market that need some dressing up, the 203k program has seen more loans endorsed nationally in this fiscal year compared to all of fiscal 2008, according the federal Office of Housing and Urban Development (HUD).
According to Jane King, vice president of the renovation lending division of Freedom Mortgage in New York, the Northeast has generated most of those loans because the housing stock is somewhat older and needs a lot of work.
Even with the uptick in 203k endorsements, some of the program’s biggest proponents can’t believe more people don’t use the product more.
“It should be the number-one loan product out there,” said Phillip Murphy of A.M. Consulting in Malden, who has been doing HUD consultations and appraisals for 15 years. “I can’t figure out why it’s not, to be honest. I don’t know if it’s totally embraced by all the parties involved.”
The 203k program itself is nothing new. Around since the early ’90s, the program saw great success in its infancy. But in October 1996 the FHA put a still-standing moratorium on investors using the product, limiting it to only owner-occupied buildings of four units or fewer.
Combined with rising home values and static FHA loan limits, the program slowly fell out of favor, and was all but forgotten during the building boom earlier this decade. The FHA requires a fair amount of documentation for the program, and during the gun-slinging times of no-doc, no-verification loans, mortgage brokers didn’t bother.
“Loan officers were doing refinances, and they were getting paid quick,” King said. “They didn’t want to do something that would take them longer, even though it could be quite a bit bigger.”
“You’d be surprised how [few] real estate agents are even familiar with the 203k program,” said Mark Alvarez of wholesale lender M&T Bank in Scituate. “It’s a great opportunity for mortgage brokers to help their Realtor clients sell properties.”
Nitty Gritty
There are two sets of loans in the 203k program. One is more involved, and requires a minimum of $5,000 and up to the maximum of the FHA loan limit, and HUD consultants to review the scope of the work planned on the property after an appraisal. The loan can be used for structural work, or bigger and more expensive projects.
The more commonly used product is the 203k streamlined loan, which has a $35,000 loan limit for cosmetic work. Instead of requiring a HUD consultant’s appraisal, the loan can be initiated by contractor work estimates.
The borrower then puts down the traditional FHA 3.5 percent minimum payment on the total loan. The rehab funds are put into an escrow account to be doled out to contractors for the work, and an appraiser does a final review of the home to make sure the work is done satisfactorily before freeing the money.
Interest rates are slightly higher on the FHA loans compared to market rate.
Education Is Key
Murphy said he’s shocked that more Realtors aren’t using the program to pre-qualify homes with estimates, and then bringing the packages to buyers.
“They can move their product out a lot quicker when they’re marketing this as a renovation,” Murphy said. “Everybody wins in that game. But I don’t think that it’s been totally embraced. These houses should be getting scooped up and renovated, and I see some resistance in that.”
Alvarez said the process does take longer than a traditional loan, but that shouldn’t be enough to turn off Realtors.
“They touch the file a few more times than the regular FHA process,” he said. “The key is really setting the expectations with the Realtors and the borrowers with the turnaround time. Quite frankly, it’s just a matter of training the loan officers on the program.”
