From fixer-upper to dream home with a 203(k) mortgage
5/18/2006If you can t afford to either buy or build the home of your dreams, you might be able to afford to buy a house that you can turn into your dream home. And you could probably do it with a Federal Housing Administration, or FHA 203(k) renovation loan -- a single loan that allows you to both buy the home and pay for the upgrades it will need.
The 203(k) loan is less expensive than a second mortgage or an equity line of credit that you might have to get for repairs, as it is part of the first mortgage, with first-mortgage rates. As an added bonus, you can even add enough to the loan to cover the cost of renting an apartment or obtaining alternative housing for six months during the home renovation work.
There are actually two different 203(k) programs: the traditional one and one that is streamlined, explains Lemar Wooley, a spokesperson for the Department of Housing and Urban Development, or HUD, in Washington. We ll look at the difference a bit later.
When looking for a home with possibilities, it is worth noting that real estate agents tend to refer to over-aged homes and beaten-up or worn-down structures as either handyman specials or fixer-uppers, and they use those terms interchangeably.
It helps to make a clear distinction in your own mind about them. Regardless of what the agent or advertisement might say, you might want to consider a home a handyman special if it just needs basic amenities; maybe the rain gutters are hanging down, there are a few holes in a couple of the walls, missing shingles, shutter or window problems -- that sort of thing. We re talking about simple jobs that someone handy with tools can handle or learn to repair.
You might want to reserve the term fixer-upper for those handyman specials that no one has been handy with for a long, long time. Here you are looking at the sort of work plumbing, structural, electrical or roofing, for instance -- that you will likely need a contractor or other skilled tradesperson to complete.
With that in mind, let s look at the differences between the 203(k) and its newer and more simplified sibling, the streamlined 203(k).
For a home to qualify for a standard 203(k) mortgage, there must be at least $5,000 worth of non-cosmetic work that needs to be done. What s the difference? Painting is cosmetic; replacing damaged wallboard is not. Putting in new kitchen cabinets may be cosmetic, but putting them in so a person in a wheelchair can reach them is not.
The standard 203(k) loan covers structural alterations and construction, modernization, roofing, flooring, tiling, carpeting, some landscaping, getting rid of health and safety problems, as well as plumbing, electrical, and heating and cooling systems. It can also be used to make the home more energy efficient through solar panels, by adding insulation, dual-pane glass and so on. For more information on what is or is not cosmetic, talk to your lender and make sure he or she is familiar with the program.
To find a lender online, go to www.hud.gov, and scroll down to At your service, and click on Find a HUD-approved lender in your area. Then follow directions. Or, you can call the consumer hotline at (800) 767-4483. Whatever you use the money for, the work has to start within 30 days of signing the mortgage, and it must be completed six months later.
Wooley says that while there is a $5,000 minimum, there is no upper limit on rehabilitation costs, but the loan amount can t exceed the applicable loan-to-value ratio and maximum loan limit for similar, nearby properties. Unlike loan limits set by Fannie Mae and Freddie Mac, Wooley points out that FHA limits vary from region to region across the country.
Basically, the total mortgage cannot be for more than 110 percent of the expected market value of the property upon completion of the work. You have to look at what the house is selling for, the amount of work it needs and how much that work will cost. Then you have to figure out what the value of the house will be once the work is done. You can even include a contingency reserve of 10 to 20 percent of the remodeling costs.
As with a construction loan, you have access to the rehabilitation loan on an as-needed basis to pay the contractors. Work has to be inspected and approved before payments will be made.
There is no minimum requirement for a streamlined 203(k), and the maximum is limited to $35,000 in repairs, because anything greater would most likely not meet the test of simple and uncomplicated repairs, Wooley adds. The streamlined version also allows for a wider variety of repairs and replacements, more cosmetic work and less paperwork. The program covers many of the problems often listed in pre-sale home-inspection reports. If the work can be done for less than $15,000, no formal inspection is required to release the money.
Wooley says the streamlined program is a great way to buy or market the sale of a home that has only cosmetic problems. A real estate agent trying to convince a buyer that the shag carpet can be replaced easily could point to this program as an efficient way to fold the costs of buying new carpeting into one loan. We hope that as more real estate agents become aware of the program, it will become more popular. He adds that it should be especially well received in those cities and neighborhoods with older houses.
The streamline program is especially useful for those who can handle the tasks required to upgrade a handyman special. If they do the work themselves, however, they do so for free. Money can be used for materials, or to hire contractors, but not to pay themselves. The reward for their sweat equity comes in the improved appearance and increased value of their property.
Very few of us can afford to either buy or build the home of our dreams, but with a home rehabilitation loan we can often turn a bad dream into a sweet one.