203(k) Rehabilitation Loan, Is It For Me?

What is an FHA 203(k) Loan?

There seems to be a lot of confusion about the 203(k) loan from FHA. It is easy to see why, just look at the name, when I think of rehabilitation I think of a long drawn out battle. If I close my eyes and imagine a property that I would need a rehabilitation loan for I picture an old dusty mansion with exposed pipes, a broken down roof with mold damage everywhere, the hard wood floors are worn, warped and need replacing, there are holes in the walls exposing daylight through the bricks and I picture the only thing salvageable being the foundation and load bearing walls. In truth, the 203(k) is perfect for that type of home, but it is also a good program for other types of homes as well. Let's examine some of the options available with this wonderful program.

What is the 203(k)...Really?

One of the questions I'm most commonly asked is "Do you think that this property will pass FHA inspection?". My reply is always the same, as much as people seem to believe that FHA has their own super strict inspection, the do not. There is no inspection required by FHA. They do require that the house is insurable, and sometimes the insurance company will require a 4 point inspection, but FHA doesn't require it. The only other "inspection" required is the appraisal and as long as there are no obvious reasons for the house not to be in good livable condition it passes FHA guidelines. Why do I bring that up? Because the first thought I get when I think about a "rehabilitation" loan is a loan for properties that don't pass FHA's "required inspections", but the 203(k) is so much more than that.

If I were naming the 203(k) loan product, I would have used a slightly different term than rehabilitation. I would have called it the 203(k) Home Improvement loan. This loan can be used to modernize a perfectly livable home, or to change the flooring in a house because you would prefer bamboo flooring to carpet, or tile flooring to hard-wood because you like it better. There is a minimum $5,000 repair threshold in order to do the loan, that has to be met on structural changed, such as remodeling a bathroom and kitchen or changing the flooring. After that 5,000.00 threshold is met, you can even include items like new appliances.

Another great part of this program not many understand is that the 203(k) can be done as a re-finance to a home you already own, this truly makes it a home improvement loan rather than a rehabilitation loan.

Limitations

Of course this is still an FHA loan, so only owner occupied properties are eligible, though the program seems like the perfect fit for the investor buying a foreclosure property that needs some updating, investors need not apply. However a person looking to buy a foreclosed home as their primary residence is the perfect candidate for this type of loan.

Also the process for a 203(k) loan does take longer than a traditional FHA loan, but when you do move in you can have the house completed to the way you like it, with the repairs done by certified professionals and the cost rolled up into one payment with your mortgage.

All of the work must be properly permitted and completed by professionals that are licensed and insured, so there is no getting Uncle Larry to do the work for you to save money. For the right borrower, the 203(k) loan is a fantastic product and should be seriously considered as an option for those not 100% satisfied with the house they may be purchasing. I for one, am very excited about the opportunity to start offering these loans to my clients again.

If you are a realtor with a house that has been on the market for a while and is in need of some updating, it would probably be a good idea to talk about the 203(k) option with your favorite mortgage professional

What Rising House Values Mean To You As A Buyer

Those of us in the real estate and mortgage industry have been telling clients that we are seeing housing prices on the rise, now there is empirical data to support our anecdotal evidence. The Case-Shiller 20 City Composite report is showing that the average of the 20 cities has the housing prices on the rise, back to the levels of April 2004. In news that is a little more pertinent to our market, Tampa FL is back to the levels of November 2003 and on the upswing with a 10% rise when comparing May 2012 with May 2013.

What does this information mean to you?
This means several things for the prospective home buyer.

1. The days of offering 75% of the asking price on a short sale or bank owned property and getting an offer accepted are likely over, unless the comparable sales in the market show a substantially lower value than the asking price. This is no longer a market where it makes sense for the bank to take whatever they can get and cut their losses as quickly as possible. In today's market if a bank has to keep the house on the market even for 6 months, at the end of those 6 months the property is going to be worth 3-5% more than it was when it was listed. Offers now have to make sense and what we are seeing be accepted today is typically offers within 5% of the asking price
2. It may be time to start thinking of accepting higher loan values and paying Mortgage Insurance rather than depleting your savings, in a market where houses are gaining 10% of their value year over year, many times it makes more sense to keep your money in your own pocket, put less money down, pay a years worth of Mortgage Insurance and let the increase in value remove the Mortgage Insurance for you. To illustrate, let's look at an example home sale of $100,000 to make the math easy. In order to avoid paying mortgage insurance you would have to put down 20% or $20,000.00, which would have a principal and interest payment of $417.00 / month. Instead you could put 10% down, save $10,000.00 and have a principal and interest payment of $469.00 / month. Mortgage insurance would be required and carry a premium oc about $37.00 / month. The math looks like this. 469 (principal + interest at 10% down) - 417 (principal and interest at 20% down) + 37 (monthly mortgage insurance premium) * 12 = $1068. The following year pay for an appraisal, let's estimate high at $500.00. You have spent a total of $1,568.00 to save $10,000.00. If the housing market should increase only by 3% over the next 3 years you are still saving a substantial sum of money looking at a total cost of $3,704.00 paid over three years including the estimated $500.00 for the appraisal vs saving $10,000.00 at closing.
3. Adjustable rate mortgages are about to start making sense again. While the rates were at historic lows in the 3% range, it only made sense to lock that rate in for as long as possible, as mortgage rates climb higher towards historical norms in the 5-6% range, it could make sense to lock in a 3.75% rate for three years. While the mortgage rates are likely to rise, they are also likely to stay within a point or two for the next 3 years, Interest rates haven't started with a 7 since 2002 coming out of the dot com boom. At this juncture it is likely to take significant growth from the economy to raise the interest rate more than a point. When you look at locking in a rate in the 3's for 3 years and the interest rate not likely to be much higher than it is now in three years coupled with the rising price of houses. It may make sense to take a low interest rate for three years, especially for a first time home buyer on a starter home, then sell in three years to move up rather than taking in the higher rate for 30 years.

In summary, now is an excellent time to buy as the market is still in the infancy of the rebound, this is a time where the housing prices are less expensive that they are likely to be at any time in the near future, with rates that are still on the low side historically speaking, but with rising mortgage rates, it may be time to start considering all of the financing options available and not just locking in the rate for as long as possible.