All-in-one loan accommodates rehabs
All-in-one loan accommodates rehabs
First-timer homebuyers often scramble to find the funds required for the downpayment. Cash for needed repairs is simply not available and it will have to be saved over time.
Given the drop in home values in many regions, the need for extra cash to close a home sale or refinance and then fix up the house spans all age groups and price ranges. For people without a job or on a fixed income, proper maintenance and repairs simply are not getting done. The home equity pot of funds is not what it used to be.
However, there's an underused program that solves the cash problem. More and more consumers are discovering the Federal Housing Administration's 203(k) program, which provides cash for repairs and permanent mortgage financing in one loan.
"In today's marketplace, a number of homes have the potential to be all that a buyer could hope for," according to Clark Schafer, a specialist in 203(k) financing. "The 203(k) renovation loan can turn an almost perfect house into a dream home."
Most mortgage loans provide only permanent financing. Typically, the lender will not close the loan and release the money unless the condition and value of the property provide adequate loan security. When rehabilitation is involved, the lender usually requires improvements to be finished before a long-term mortgage is granted.
When a buyer wants to purchase a house that needs repair or updating, the buyer usually has to obtain interim financing to purchase the dwelling, then additional financing to do the work. When the rehab is completed, a permanent mortgage, which pays off the interim loans, is made. Interim financing often involves relatively high interest rates and relatively short payback periods.
Borrowers are not permitted to do their own renovation work unless the borrower is a professional in the specific line of work being done. All borrower-contractors must be approved by the FHA before performing any work on the home.
The FHA 203(k) program was designed to roll all financing into one package. The borrower can take out one mortgage loan, at a long-term fixed or adjustable rate, to finance both the acquisition and the rehabilitation of the property. The mortgage amount is based on the "as will be" (projected) value of the property and takes into account the cost of the work.
The program also allows homeowners to include the cost of the inspection, an origination fee and the cost for a title insurance update.
The process begins with a 203(k) Plan Consultant, who prepares a list of all projects to be completed. That list is then given to the participating lender. This work order contains a detailed cost breakout of each repair and improvement.
The amount that is put into escrow is typically 110 percent to 120 percent of the cost of the renovation work, the cost of draw inspections and the final title update fee. The remaining escrow funds are applied to the loan balance or are used to pay for any additional items not included in the original plan.
The lender then orders the appraisal. The appraiser assigns a value to the property subject to completion of the renovation project. The loan is then approved, closed, and the renovation escrow account is set up in an interest-bearing account with the lender.
The project must begin within 30 days from the time the loan is approved. All work must be completed within four months.
Draw requests are received, inspected and approved by the 203(k) Plan Consultant. The Plan Consultant furnishes an approved request, accompanied by photos, to the lender. A 10 percent holdback is disbursed to the borrower and contractor 35 days after all renovation items are finished and the appraiser certifies completion of a final inspection.
FHA 203(k) loans are also available for home purchase or refinance. The refinance component can combine all existing loans plus provide the funds for needed repairs.
To minimize risk to the mortgage lender, the loan is eligible for endorsement by FHA as soon as the mortgage proceeds are disbursed and a rehabilitation escrow account is established. At that point, the lender has a fully insured mortgage.
The FHA 203(k) loan can come in handy in a foreclosure sale. In some cases, the previous owner has taken fixtures or the structure is in dire need of repair. Loan proceeds would provide for the updates and the permanent financing.
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