Dennis Norman
By: Dennis Norman
According to a report issued by the Office of the Comptroller of the Currency (OCC) as of June 2009 there were nearly 2 million foreclosed homes. Many of these foreclosed properties are still vacant and in need of repairs.
Many buyers are seeing these foreclosed homes as an opportunity to buy a home at an attractive price, however many are unable to do to the lack of availability of financing for “as is” type property. In addition to the fact that today most lenders require 10%-20% down-payment for a loan to purchase an “as is” property, it is difficult, if not almost impossible, for a buyer to find financing for the necessary repairs or rehab the home may need.
Because of these reasons, now, more than ever, FHA’s 203k program should help your buyers find the financing they need to take advantage of opportunities on foreclosures, REO’s and other “as is” type sales. In case you are not familiar with the FHA 203(k) program, it is a program that has actually been around quite a while, since 1978 to be exact. The program’s primary mission is to help borrowers acquire and rehabilitate single-family properties. In addition, the 203(k)program can be used to refinance existing mortgages and cover additional rehabilitation costs.
The FHA 203(k) program has always been kind of a “sleeper” program in my opinion reaching 13,000 such loans in 1998 but then falling every year after that down to about only 3,000 loans per year in 2005 and 2006. It has since gained popularity again with over 6,000 loans in 2008 and over 11,000 in 2009. Behind the recent popularity of this program may be, in addition to the points I already made, the fact that in February of this year the loan limits for FHA loans were increased in high-cost areas to $729,750 which means there are now many more properties eligible for this type of financing.
The beauty of the FHA 203(k) program is, qualified borrowers (that meet FHA’s normal underwriting guidelines) when purchasing a property that needs major rehab or just cosmetic repairs can finance:
- The purchase price of the property
- Closing costs
- Repair costs
- Up to six months of mortgage payments (for larger rehabs)
Some of the attractive features of a FHA 203(k) loan are:
- Total loan amount can be as much as 110% of the value after rehab
- Buyers only need a down payment equal to 3.5% of the total loan amount
- Maximum mortgage, depending on location, can range from $271,050 to $729,750
OK, before you get too excited and start calling every investor you know, this program unfortunately is only for buyers that are going to occupy the home (and certain nonprofits and government agencies). However, for a homeowner this offers a tremendous opportunity.
The types of properties that are eligible as well as eligible uses of the loans are:
- one family to four-family dwellings that are at least 1 year old
- can be used to convert a single-family dwelling into a two, three or four family dwelling or convert a multi-family building into a single-family home as long as the borrower intends to be an owner-occupant.
- demolished homes are eligible as long as part of the existing foundation remains intact
- typical costs permitted in terms of repairs include room additions, deck installation, HVAC systems in addition to cosmetic improvements as long as certain thresholds are met.
Historically FHA 203(k) loans I believe have been primarily done by mortgage companies but now the OCC is encouraging banks to utilize the program to help them dispose of the homes they have foreclosed on. In it’s July 2009 newsletter, the OCC said “banks concerned with maintaining collateral values in their residential portfolios might find it advantageous to finance the rehabilitation of blighted or vacant foreclosed properties…..the use of 203(k) loans might establish more substantial bank relationships with additional accounts.”
To find out more about FHA’s 203(k) program click here.
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