The FHA rehabilitation loan

By some estimates as many as 35-40% of homes sold in the Portland-Metro area thus far in 2009 have been bank-owned or short sales.  Often times these sales involve distressed property because the sellers lack financial motivation to provide basic maintenance to the home.

Looking ahead I don’t expect this pattern to change as we head into 2010.  Although reliable data isn’t widely available it is assumed that banks are sitting on hundreds if not thousands of additional homes and foreclosure rates remain high.  This guarantees a steady supply of distressed property on market over the next couple years.

Buying distressed property can create substantial opportunity because with a few repairs and cosmetic touch ups homebuyers can realize immediate equity appreciation.

Unfortunately buying distressed property is problematic. Often times conventional lenders will not approve loans secured by property with “below average” condition and the banks and cash-strapped sellers who own the home are generally unwilling to invest in repairs.

However, the FHA’s 203K streamline program is a great solution.  This program enables borrowers to finance the purchase (or refinance) of a home and the cost of its rehabilitation through a single mortgage.

Here are a few bullet points about the FHA 203K streamline loan:

*Eligible properties: Existing homes that have been completed for at least one year (no new construction).

*Down Payment: Homebuyers must have at least 3.5% for their down payment.  The 3.5% is based on the initial purchase price.  This may come from a gift from a qualifying family member.

*Maximum Loan Amount: The maximum mortgage loan amount may not exceed 110% of the after-improved value of the home.

*Maximum Rehabilitation Amounts: The maximum amount for repairs and improvements is $35,000 (this must include a 10% contingency reserve).  The homebuyer may combine the $35,000 streamline maximum with an $8,000 energy efficiency provision for a maximum of $43,000.  There is no minimum amount.

*Eligible Improvements: This program is intended to facilitate uncomplicated & cosmetic rehabilitation and/ or improvements.  Therefore, structural repairs and changes, luxury items (i.e. hot tub), and additions are not allowed.  Examples of what are acceptable are roof repair/ replacement, window repair/ replacement, and weatherization.

*Eligible Expenses: Eligible expenses are material, labor, overhead, and construction profit, plus expenses related to the rehabiliation such as permits, fees, inspection fees, licenses, and lien protection fees.

*Contractor or Self-Improvement: In most circumstances self-improvement is not permitted.  Therefore, homebuyers must hire a qualifying contractor.

*Qualifying for the loan: In general, the qualifying factors for the streamline 203K is the same as the standard 203B loans.

*Transaction process: Homebuyer is pre-approved for 203K loan, finds home and reaches agreement with seller (be sure to have FHA Amendatory Clause and Real Estate Certification signed with purchase agreement), homebuyer must hire licensed/ bonded contractor to get estimates on repairs, loan application along with HUD form 92700 is submitted to lender, appraisal is completed, loan is approved and funded, rehabilitation amount is funded into escrow account, 50% initial disbursement is made to contractors, contractors complete work, final inspection may be required, and final payment is made to contractors.  Because of the additional paperwork and underwriting requirements associated with the rehabilitation work we recommend 60 day closing schedules.

*Interest rates and closing costs: Because of the limited supply of wholesale 203K loan offerings and because of the recommended extended close times the interest rate for a 203K loan will be about .125%-.375% higher than the standard FHA loan.  A homebuyer can also expect an additional $500 in closing costs because of more extensive appraisal and additional administration requirements.

This post is meant to provide a concise summary of the 203K loan program.  Please contact me directly for further information and necessary paperwork.