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Robert Nusgart: An FHA loan that includes rehabbing costs

America’s housing inventory is ballooning with foreclosures and abandoned homes. Short sales, where owners sell their homes for less than what they owe, are commonplace. Also commonplace is that these homes typically need repair or updating.

In the last several years, borrowers seeking construction or rehab loans found out that they were hard to come by or that you had to have 20 percent down or equity in a property to get approved.

However, one program that has been used for many years, the FHA 203k program, is having a renaissance.

The FHA 203k program is perfect for borrowers who find a property that is way below market value because it is a wreck. The program allows a borrower to acquire the property and build in to the overall loan all the necessary repairs along with a wish list of improvements to bring the property back to life.

In a way, it sounds too good to be true. But the program seems to be the magic bullet to help restore blighted homes that have fallen into foreclosures.

So what can you do with a 203k loan? Here are just a few things:

-Repair a kitchen,

-Add new carpeting and paint,

-Improve or add a room or bathroom,

-Fix the roof,

-Finish the basement,

-Repair the foundation,

-Replace old lighting fixtures,

-Install new windows and doors,

-Update the electric and plumbing.

Basically, just about anything that a house needs, a borrower can do as long as they qualify financially for the loan and that the “after-improved” value of the home is within FHA guidelines.

The 203k program comes in two varieties. The first is what is called a “streamline,” and the second is called a “consultant.”

With the streamline, the borrower is limited to the amount of money available to rehab or update the home. The streamline maximum is $35,000. With the streamline, the borrower just needs to find a licensed general contractor to specifically submit his repairs. At closing, the contractor gets either 40 or 50 percent of the rehab amount to start work, and when the work is completed, the appraiser — who has already worked up the “after-improved” value and has the bid — will re-inspect and then will request from the lender that the final monies be disbursed.

One word of caution: If the initial appraiser finds issues with the structural aspects of the home, then the streamline must be turned into the more elaborate consultant 203k. Overall, the streamline version is best used when someone wants to update a kitchen or bath or put down fresh carpet and paint.

In the consultant 203k, an FHA-approved consultant is first brought in to inspect the property. The consultant gives the buyer an estimate of the repairs that FHA will require and then will take into consideration the buyer’s wish list of how they want to improve the property.

The buyer then finds a general contractor, and the consultant will give the contractor the “work write-up” (without costs) and have the contractor bid on the project. Eventually, the consultant and the contractor come to terms on what the project will cost, and that work write-up is submitted to the appraiser, who sees what improvements are going to be made and then provides what the property will be worth after all the work is done.

A borrower is eligible to do the work themselves, but they have to show that they have the time and the expertise to do the job. Underwriters typically frown on “weekend warriors,” so it’s best to get someone to do the work.

Another unique aspect of the 203k loan is that it will allow the borrower to build in as many as six monthly mortgage payments into the overall loan amount while construction is taking place. In this way, the borrower — who may be a renter — doesn’t have to worry about carrying two housing payments.

As for the mortgage implications, 203k loans carry the same qualifying parameters as a regular FHA loan — 3.5 percent down payment, up to 6 percent seller concession allowed and loan limits in the Baltimore metro area of up to $560,000. So these loans aren’t just for inner-city row houses; they can be used for homes in well-established suburban neighborhoods that may have gone into foreclosure and neglect.

As for interest rate, these loans tend to be more risky, therefore the rates are usually about a half-percentage point higher than a traditional FHA 30-year fixed-rate loan. Also, just like a regular FHA loan, there will be an upfront mortgage insurance premium charged (1 percent of the base loan amount) and monthly mortgage insurance. However, it certainly is possible that when the home has been rehabbed, the after-improved value may make it eligible to refinance into a conventional, non-government loan and eliminate the monthly mortgage insurance.

Right now, the 203k product, which can also be used for refinances, is limited to owner-occupied homes. However, in the next few months, the word is that investors will be allowed to use the product, and that certainly will help get thousands of dilapidated bank-owned homes back into shape and ready for a new generation of home owners and renters.

Robert Nusgart is a loan officer with Prospect Mortgage LLC., which is associated with The Strata Group in Baltimore. He can be reached at 443-632-0858 or by email at Robert.Nusgart@prospectmtg.com. Visit his website at www.RobertNusgart.com for the latest mortgage and financial news.