The house that you actually buy may be a long stretch of the imagination from the home of your dreams.
But if the basics are there and the price seems fair, why not take the house and turn it into your dream home?
By using the FHA 203 (k) loan program, a buyer can combine the purchase price of the property with improvement costs. Although the 203 (k) loan program is helpful for buyers of fixer-upper homes, the program can also benefit current homeowners desiring repairs or real estate investors in search of profit.
Administered by the Federal Housing Administration–a division of Department of Housing and Urban Development, the FHA 203 (k) program was primarily designed for the rehabilitation and repair of single-family properties.
Unlike other mortgage financing plans where any property improvements must be completed before funding, the FHA 203 (k) program will fund the purchase loan and establish an escrow account from which repair payments are made to an approved contractor.
A qualified borrower can do the work himself, but cost estimates, and appropriate surveys and plans, must be submitted for HUD approval.
Eligible improvements are determined by FHA, but the list is generous. Eligible repairs range from the necessary (such as a new roof, plumbing, electrical and structural damage) to the cosmetic (such as remodeling bathrooms and kitchens). Repairs must total a minimum of $5,000.
FHA 203 (k) financing can be used for the following types of transactions:
– Purchase of an owner-occupied dwelling.
The maximum loan the owner-occupant can obtain is based on the lesser of two amounts.
The first value used is the as-is worth of the dwelling before rehabilitation plus rehabilitation costs. According to Bill Kirkland, government loan underwriter of Seafirst National Bank, Seattle, 97 percent is the maximum loan-to-value (with no second mortgage allowed).
The second value used is 110 percent of the property’s estimated value after improvements, in which case the maximum loan-to-value is 95 percent.
An adjustable rate mortgage is an option to the borrower who will be owner-occupant of the dwelling.
– Refinance-plus feature of an owner-occupied dwelling.
A homeowner can refinance an existing home, plus borrow funds to rehabilitate the home. An adjustable rate mortgage is available as an option to the owner-occupant borrower who is refinancing under this transaction.
– Investment property purchase.
The maximum loan amount a non-occupant borrower can borrow is 85 percent of the HUD-estimated value of the as-is value of the property plus improvement costs, or 110 percent of the expected market value after work is completed.
An adjustable rate mortgage may not be used in a non-owner occupied investment property purchase, as the allowable ratios of rental income to expenses could change when the adjustable rate changes, said Sal DiBenedetto, account officer of Norwest Mortgage, in west suburban Elmhurst.
– Investment property refinance-plus feature.
An investor can refinance an existing investment property, plus borrow funds to rehabilitate, remodel or add on to the property. An adjustable rate mortgage may not be used.
– Investor purchase with escrow commitment for resale.
This transaction allows profit-taking when the property is purchased at a good price, rehabilitated and sold at the after-improved value to an assuming borrower.
Also, no down payment is required to assume this type of loan if the assuming borrower is a first-time home buyer.
According to Dave Wright, government loan underwriter of Interfirst, a division of Standard Federal Bank in Ann Arbor, Mich., an investor-buyer can turn himself into a seller in the same escrow transaction, and therefore can make a profit out of this escrow commitment for resale.
Jim Ragan, President of K Mortgage in New Jersey, provided an example of how an investor can utilize the 203(K) loan.
“A property costs $50,000, needs $22,000 of repairs, and will have closing costs and fees of $3,000 for a total of $75,000. You have to put 15 percent (of the acquisition cost) down ($11,250).
“Now, the loan is made for the future value of the property after repairs. Good properties in the area sell for $100,000. We can loan 95 percent of the improved value, so we loan $95,000. We put the $20,000 difference in escrow and release it to the borrower when the repairs are finished.
“The whole deal nets the investor $8,750 ($20,000 in escrow minus the $11,250 down). Now the investor can sell the property for $100,000, or rent it.”
– Investor refinance with escrow commitment for resale.
Here, the first lien on the investment property is paid off, plus the additional new loan to rehabilitate, remodel or add on to the investment property under a purchase contract from a borrower.
No down payment is required for the first-time home buyer assuming this type of refinance loan.
Although the 203 (k) loan cannot be used for condominiums or co-ops, most existing single-family homes and multi-unit buildings (up to four units) are eligible.
Other types of transactions eligible for financing under FHA 203 (k) include financing the residential functions of a non-residential (storefront) property or mixed use residential property, and select HUD-owned (repossessed) properties.
———-
Jim DeBoth is president of Mortgage Market Information Services. Address your questions to Mortgages, c/o the Chicago Tribune, Real Estate Section, 435 N. Michigan Ave., Chicago, Ill., 60611. Sorry, we cannot accept questions over the phone and will not give personal replies.
