FHA 203(k) Renovation Loan....Easily the Most Underused and Least Understood Mortgage Product Available
The opportunities for utilizing the FHA 203(k) program abound in the current market; however, there are very few consumers or agents taking advantage of the opportunity. The reasons for the under utilization of the program expose a couple areas of misunderstanding:
1). The 203(k) program has been in existence and available for consumers for well over twenty years. However, there are very few lenders who offer the product and there are even fewer lenders and loan officers who know how to originate and process the program.
2). Listing and selling agents are not familiar with the 203(k) program and, as in all of human nature, there is a tendency to avoid that which we do not know. In preparation for this article I sent emails to as several real estate agents with the following questions:
A. Have you ever worked with a buyer or seller utilizing the 203(k) program?
B. As a listing agent, would you be inclined to accept an offer from a 203(k) borrower?
C. As a selling agent, would you be comfortable with working with a consumer through the process of a 203(k) program?
Contrary to what I had heard from other loan officers, not one real estate agent objected to the use of the 203(k) program when representing either the seller or the buyer. However, almost all of the agents questioned did not understand the program and readily admitted that they would have to be educated in the process prior to encouraging their sellers to accept an offer or working with buyers looking for a renovation project.
(Note: Karen Fiddlerin Mission Viejo, CA is the only real estate agent I corresponded with who has first hand knowledge of the product and she specifically said the biggest challenge was in educating the listing agent about the product).
3). Consumers are not aware of the program and options available to them because their loan officer and/or their agent have not provided them with thorough knowledge of the program.
The current market of undervalued homes, foreclosures and short sales provide a great opportunity for agents and consumers to create opportunities that would not exist with any other mortgage product. The purpose of this series provide both agents and consumers with a overview of the 203(k) program, implementation and process of the obtaining a 203(k) loan, marketing the loan to sellers, buyers and refinancing consumers and creating a vision for showing all consumers how the 203(k) program could create instant equity in a purchase or refinance of a currently underwater home.
Part One: Overview of the FHA 203(k) program
The 203(k) program is a renovation loan, available for either purchase or no cash out refinance of an existing home within the same loan amounts limits of traditional FHA loans. The program allows for minimal (as low as $5,000.00) cosmetic work, including replacement of appliances as well as a complete rebuild or renovation of an existing property (limited to using at least a portion of the existing foundation).
The loan amount is based upon an appraisal of the specified work to be completed (future value of the home) and allows for an escrow/impound account of up to six months complete housing payment if the house is uninhabitable during the renovation. Final loan amount may be up to 103% of the future value as provided by the appraisal. (NOTE: Actual FHA guidelines allow for loan to values up to 110%, however, lender overlays have reduced this amount to 103%).
There are two versions of the 203(k) program: A streamlined (up to 35K) and a full 203(k). Currently, investors have balked at the advance deposit on the streamline process and have pulled back from offering this version; therefore, only information of the full 203(k) will be presented in this series.
Underwriting Guidelines Summarized
- Owner occupied, 1 to 4 unit properties, SFR, condo and PUD
- HUD/Bank Repos
- Existing homes complete for one year
- New construction on part of original foundation
- Existing home moved to new foundation
- Structural alterations and additions
- Remodeling kitchens and bathrooms
- Changes to eliminate obsolescence and reduce maintenance
- Modernize plumbing, heating, AC and electrical systems
- Energy efficient improvements
- Install or repair well or septic systems
- Roofs, gutters and downspouts
- New free standing appliances
- Interior and exterior painting
- Flooring, carpeting and tile
- Swimming pool repairs (NO new pools, spas or luxury items)
- Other improvements that are a regular part of real estate
Rates competitive to traditional FHA loans
Fully assumable thirty year fixed rates
Traditional FHA credit and income qualifying guidelines
30 day closingss possible
660 credit score required
General Contractor required (home owner may work as sub for GC)
Up to 6 months PITI and monthly MIP rolled into the loan
Next installment will list the process flow for agents and consumers through the underwriting and renovation process.