With so many home foreclosures and short sales on the market that are in need of "TLC" or a "Handyman's Touch" and with 100% financing virtually gone the way of the Do Do, many first time and lower income home buyers who want to take advantage of the buyer's market by investing in a home are wondering how to get into an inexpensive property where they can build some equity and not have a lot of out of pocket rehab and renovation expenses.

The answer is the FHA (Federal Housing Administration) Section 203(k) Program. The qualifications, eligibilities and process can be complex, so it is important to have a savvy Realtor and Lender who are very familiar with the program to assist the home buyer through the process.

Most mortgage financing plans provide only permanent type financing where the lender will not usually close the loan and release the mortgage proceeds unless the condition and value of the property provide adequate security for the loan amount. However, when a property is in need of rehabilitation, this means that a lender typically requires the improvements to be finished before a long-term mortgage loan is made. This often serves as an impossible roadblock for first time and low income home buyers who otherwise are willing to rehabilitate or renovate a property in need.

This is where the U.S. Department of Housing and Urban Development's (HUD) FHA 203(k) Program comes in. When a homebuyer wants to purchase a house in need of repair or modernization, the homebuyer usually first has to obtain financing to purchase the property; additional financing to do the rehabilitation construction; and then a permanent mortgage when the work is completed to pay off the interim loans with a permanent mortgage. Often the interim financing for the acquisition and construction loans, if they can even qualify to get them, involve relatively high interest rates and short amortization periods.

The Section 203(k) program was specifically designed to address this situation. The borrower can get just one mortgage loan, at a long-term fixed or adjustable rate, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the rehabilitation/renovation work completed, taking into account the cost of the work. To minimize the risk to the mortgage lender, the mortgage loan (the maximum allowable amount) is eligible for endorsement by HUD as soon as the mortgage proceeds are disbursed and a rehabilitation escrow account is established. At this point the lender has a fully-insured mortgage loan.

The 203(k) program is very flexible and does not only apply to first time and lower income home buyers as it can even be used to rehabilitate or move one- to four-family dwellings that have been completed for at least one year.

In the past, not many Realtors were even aware of the program and few FHA Qualified Lenders would work with 203k loans because it meant a good deal more work on their parts. However, with the recent shifts in the lending markets and the number of properties, first time and lower income home buyers that could benefit from the program, forward thinking Realtors and lenders will respond to the need.

Brian L. A. Wess
CRS, GRI, ABR, ASR, e-PRO
Realtor®, Broker Associate
Residential & Investment Specialist
Pat Newell & Associates, Inc - Metro Brokers
Colorado Springs, CO
Direct: 719-528-6672 
Web: www.BrianWess.com 
             Your Real Estate Gladiator!^TM

Copyright © 2008 By Brian L. A. Wess, All Rights Reserved.. "Renovating the FHA 203K Way"