By LYNNLEY BROWNING
There’s a way to make essential repairs and add other accouterments without dipping into savings or taking out a home-equity loan. The Federal Housing Administration’s 203(k) rehabilitation program provides for loans covering renovation costs as well as the purchase price of a primary residence — investors excluded — and it allows for just a 3.5 percent down payment.
“It’s a fantastic program, one that hasn’t been fully utilized by the American public,” said Arthur Hood, the owner of the Vanguard Inspection Group in Teaneck, N.J., which is certified by the Department of Housing and Urban Development to help borrowers with the program.
Although the program has been around since 1978, it is not well publicized, and many borrowers mistakenly think they have to buy a wreck in order to qualify. They don’t.
The house “doesn’t have to be falling apart; it could just be outdated,” said Joseph Latini Sr., the president of Hartford Funding, a lender in Ronkonkoma, N.Y. “It just has to appraise below market value and then at market value with the repairs.”
While “run-down” typically means a foreclosure, the program also applies to many historic and older houses as well as short sales and bank-owned homes. HUD outlines the rules on its Web site.
Luxury improvements are ineligible, though the program has wide definitions of “repairs” and “modernization.” Covered repairs include a new roof or heating system (geothermal ones too). Decorative changes, like replacing vinyl with ceramic tile on the kitchen floor replacement, or painting the interior, are covered.
The loan rates typically run around a percentage point higher than conventional ones, and come in 15- to 30-year terms, either fixed or adjustable. Additional paperwork for inspection, appraisal, title updating and the like pushes closing costs $1,000 or more higher than average. Most borrowers, however, refinance to a conventional loan after a few years, Mr. Hood said.
Demand for 203(k) financing has been on the rise, although experts predict some contraction given the major banks’ current moratorium on foreclosures. For the first nine months, HUD insured $2.9 billion in 203(k) loans, compared with $3 billion for all of 2009 and $401 million in 2005.
Home buyers must put down at least 3.5 percent of the current value of the property and use a HUD-approved lender, appraiser and a contractor approved by the lender for the repairs. One list of approved businesses can be found at 203kcontractors.com.
Using a HUD-approved consultant like Mr. Hood, who charges a flat fee of $400 to $1,000, is not required, but the agency recommends it to expedite processing. A HUD-approved inspector will make around four trips to the home to ensure that renovations are being properly done; each trip costs the borrower around $150.
Most 203(k) lenders are smaller regional and community banks. Loan limits vary by geography, and range from $271,050 to $729,750, which covers the total mortgage. The first $5,000 must go toward the more substantial repairs like roof replacement. HUD insures the loan.
Once the borrower receives the mortgage, money owed the contractor for repairs is held in escrow by the lender until the work is completed; all work must be finished within six months.
A miniversion of the 203(k) — called a Streamline (k) — has a repair-cost limit of $35,000 and restricts upgrades to minor improvements like replacing gutters. In this case, the do-it-yourself approach is permitted.
“This is a loan for someone who’s willing to be a little involved,” said Jon Sigler, a banker in Madison, Conn., who works for at the Franklin American Mortgage Company.