Mortgage Updates

A little known FHA loan program has gotten dusted off as the best tool for 1st time home buyers in the rush to purchase foreclosed properties. The number of re habilitation loans processed through the FHA’s 203(k) loan program has more than doubled since last year to 11,493 at the end of July. 15,000 is the projected number for this year, compared to the 6,751 loans for 2008.

Just in the last month 50% of the home buyers I worked with were using the Streamline 203K to make improvements such as granite countertops in kitchen and baths, tile flooring and new carpet as well as fresh interior paint. The most difficult part, believe it or not, is in finding qualified general contractors willing to take on these small projects for completion. Many don’t want to touch a project under $15,000 and deal with a new homeowner.

The loan itself is pretty straight forward, but does have some “watch it’s”. Improvements under $15,000 can actually be done without a General contractor and the home owner can hire “sub contractors” directly. Each has to have current State licensing status, a resume and a list of referrals. The total cost of the project cannot exceed $35,000, which would require a General Contractor to review and coordinate.

The “watch it” is that the full cost for the scope of work cannot exceed an after completed appraised value of 110%. That does sound good, assuming that some of the improvements will reflect in the market value. Since appraisers working on HUD specifications use the market analysis as the key factor in final value, some of the improvements may not get you the “bang for your buck” –especially in states like California where market declines are also included in the overall calculation.

Example; A home is bought for $200,000, it is neglected and the appliances are missing. The price after foreclosure is discounted from what would be the “normal” value of $250,000. If the cost to improve the property with flooring, appliances, paint and counters is $20,000, the after improved value of the newly purchased property would need to be at least $220,000 for the transaction to work. If the appraisal comes in lower, then the cost of the work needs to be reduced to bring the entire project back to a maximum after improved value of 110%.

Another item that can catch home buyers off guard is down payment. FHA requires a 3.5% down payment, which is calculated on the sales price. In the example above that would be $7,000. However, when the rehabilitation loan is used the 3.5% is based on the total, in this case 3.5% of the $220,000 increasing the cash investment by $700.00.

Items that can be included; appliances, new windows, gutters, roof, garage door, central heat or air, flooring, cabinetry, counter-tops, fixtures, washer, dryer, new paint inside and/or out. Excluded items; room additions, any engineered items (moving load bearing walls), pool installation, landscaping, to name a few.