Underused loan program allows homebuyers to combine all costs

With today’s skyrocketing home prices, how can first-time homebuyers save enough cash to get in the door, let alone do the needed repairs that usually come with a home in their price range?

There’s an underused program that solves the cash problem. More and more consumers are discovering the Federal Housing Administration’s 203K program that provides cash for repairs and permanent mortgage (purchase) 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 Mark Palmer of Absolute Mortgage, a division of Capital Mortgage Corp. “The 203K 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 pay-back periods.

The FHA 203K program was designed to roll all financing into one package. The loans are available for purchase or refinance. 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.

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 203K 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.

The 203K loan also contains a less complicated “streamline” version that can assist not only buyers but also existing homeowners who want to stay in their homes but lack the extra cash for minor repairs, new cabinets and appliances.

While the conventional 203K has been around for more than three decades, the streamline came on the scene less than a decade ago. At that time, the U.S. Department of Housing and Urban Development had many homes in its inventory that needed a cosmetic overhaul before interested buyers would make an offer to buy them. The agency discovered that when a borrower could no longer make loan payments, they often did not spend the time and money to maintain the home.

The streamline was introduced as an incentive for consumers to buy HUD foreclosures and it allows for simple repairs that can be easily estimated and completed. It offered homebuyers an additional $35,000 that they could add on to their mortgage to improve or upgrade their home. HUD then made the streamline available to existing owners who wanted to refinance and improve their homes.

The streamline differs from the conventional 203K loan in some ways. The streamline may not be used for any structural repairs, has no minimum borrowing amount and does not require a general contractor even though they are often used. And, while the streamline does not require a professional consultant, the lender is responsible for ensuring that the repair cost is reasonable and customary for the area in which the property is located.

Cash-back refinances are not permitted and existing owners must be able to show that they have occupied the home for the previous 12 months. There are some specialized guidelines and loan-to-value rules, but all standard FHA criteria apply regarding credit, income and asset documentation.

Unlike the conventional 203K, which calls for a consultant to monitor the work and see that funds are disbursed as each step of the rehabilitation is finished, the streamline can be completed with just two cash draws – 50 percent for the supplier or contractor to get started and 50 percent upon completion. The total mortgage balance can exceed the purchase price of the property.

If you have been postponing needed maintenance and repairs – or have been passing on buying a home that requires fixing up – take the time to research the FHA 203K products. They could be solutions to your housing needs and your budget concerns.