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Posted on Thu, Mar 18, 2010 : 5:58 a.m.

Eyeing a fixer-upper? A FHA 203(k) rehab mortgage may make sense

By Julie Edgar

It's a pretty simple idea that has been around for a while, but may be a lot more appealing to cash-strapped home buyers looking for bargains: A government-backed program in which repairs and even wholesale rebuilding are folded into the mortgage.

The Federal Housing Authority has been offering the 203(k) housing rehabilitation program since 1978, but it hasn't been all that popular.

"What we saw in years past is it going by the wayside because mortgages were so easy to get," explains Jim Paradise, a mortgage broker at Huron Valley Financial in Ann Arbor.

"But now, as we're seeing the foreclosures, the short sales, the homes that have been left in disrepair, those are coming back into the market a little bit more and that's enticing people."

Paradise is spreading the word about the Federal Housing Administration program at a free 203(k) seminar for Realtors and builders at 9:30 a.m. Thursday, March 25, at the Brighton IHOP restaurant. A licensed 203(k) consultant will be on hand to discuss the finer details.

The way it works:

If a home needs normal repairs -- a new roof, new siding, new cabinets, plumbing, appliances or carpet, for example -- the buyer typically needs to get a mortgage first and then additional financing to do the rehab - loans that often come with high interest rates.

With the 203(k) program, the borrower can get a single mortgage loan at a fixed or adjustable rate to finance the cost of the house and the repairs. The mortgage amount is based on the projected value of the property when the work is finished. The government minimizes the risk to the lender by fully insuring the loan.

"If a house is valued at $150,000, we have to make sure they buy it for less rather than tacking on $50,000 for repairs. The purchaser would get quotes on the work and that will dictate how much we roll into the mortgage," Paradise says. "If a seller discounts the price by $5,000 and repairs will cost $7,000, the buyer will have to go back to the seller."

The buyer typically works with a 203(k) consultant to gather estimates for the work and submit it to a prospective lender. If it passes muster, the cost of the repairs will be financed in the FHA-approved mortgage. The 203(k) allows for expansions, decks and painting, but doesn't allow for luxury additions like a swimming pool.

Single-family dwellings or homes that are being converted for up to four families are eligible for the program, which can also be used to refinance existing liens against the property and rehabilitate it. The FHA requires that the house be owner-occupied, so investment properties are not eligible.

There are drawbacks, Paradise acknowledges, among them the amount of paperwork involved before the buyer qualifies for such a mortgage. Contractors need to be in place, and after the rehab is finished, the home has to be appraised by a HUD-approved inspector before funds from a rehabilitation escrow account are released to pay for the work. Paradise said the turnaround time is fairly short.

Under the program, the lender can give the borrower up to 110% of the after-improved value.

On the upside, buyers can put as little as 3 ½ percent down. Plus, there are lots of great bargains out there and sellers desperate to move.

For more information about the 203k program, go to http://www.hud.gov/offices/hsg/sfh/203k/203kabou.cfm

Space is limited for the 203(k) seminar. To register, leave a message for Jim Paradise at 734-669-8000. Breakfast is included.


Julie Edgar is a freelance writer for AnnArbor.com.