Guest real estate column: FHA loans can help rehabilitate homes
| Monday, May 11 2009 12:12 PM
Last Updated Monday, May 11 2009 12:16 PM
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David Jensen
Our current real estate market features a large number of foreclosed or physically distressed homes that have sustained a great deal of damage, show significant signs of deferred maintenance or simply need updating.
A loan program from FHA referred to as the “203(k) Rehabilitation Loan” allows a buyer to include the cost of all the repairs, improvements and upgrades into the buyer’s purchase loan, and best of all, features a competitive 30-year fixed interest rate.
The program is not used nearly as much as it should be simply because many lenders either do not make it available or their loan officers aren’t trained to originate the loan. However, it is a great program. Investors would love the opportunity to use the 203(k) but program guidelines only allow for buyers who plan to occupy the property as their primary residence.
A homebuyer can significantly increase the value of a property by making the right kind of improvements. Proper improvements to the kitchen, bathrooms and landscaping, not to mention new flooring and paint, can add more value than the cost of the improvements, instantly building equity for yourself.
The program can also be used to install energy-efficient components such as new windows, insulation, heating/cooling, etc. to create monthly energy savings that can help to offset the monthly payment. The only things you can’t use the program for is to install something like a swimming pool, which would be considered a luxury item.
Including the cost of these improvements in the purchase loan allows you to take advantage of minimizing your cash out of pocket and maintaining sufficient reserves. In most cases, the entire cost of the improvements can be included in the loan amount so most borrowers will only need the usual 3.5 percent down payment that FHA loans now require (plus closing costs — although these can be negotiated to be paid by the seller up to 6 percent of the sales price.)
One little known fact about most FHA loans is that they offer the ability to “streamline refinance.” This allows a borrower to refinance the existing balance of their mortgage without regard to current credit or most importantly, the loan to value or current value of the home. This has become incredibly important in today’s market.
The loan process for the program has been streamlined over the past few years.
David Jensen is with the Jensen Group Mortgage Advisors of First Priority Financial.
