As published in Scotsman Guide's Residential Edition, December 2005.
Congress established the Federal Housing Administration (FHA) to oversee different single mortgage-insurance plans. This includes the 203(k) Home Rehabilitation Mortgage Insurance program.
The 203(k) program was implemented to promote the rehabilitation and/or repair of houses. It combined the necessary funds to accomplish this goal into one insured mortgage. Despite past questions about its potential vulnerability for possible waste, fraud and abuse, many agree that 203(k) is an important tool in the nation's effort to put "new life" into neighborhoods whose prime might have passed.
With the U.S. Department of Housing and Urban Development's (HUD) creation of the Streamline(K) Limited Repair Program, in addition to other issues, these repair programs warrant brokers' attention.
In most cases, mortgage-financing plans only permit permanent financing. Further, a lender usually will not close a loan and release the mortgage proceeds until the property's condition and value provide for adequate loan security. This essentially requires that borrowers complete all improvements before seeking to fund the long-term mortgage.
For example, if a prospective buyer wants to purchase a house that needs repairs, that individual might first obtain financing to buy the home. Then the buyer would secure additional financing to complete necessary repairs or rehabilitation. Afterward, the buyer must secure a permanent mortgage to pay off all interim financing.
Interim financing (i.e., acquisition and construction loans) generally involves relatively high interest rates and short amortization periods. The 203(k) program was created to address the specifics of this situation.
With 203(k), the borrower secures only one mortgage at a long-term fixed and/or adjustable rate to purchase and rehabilitate the property. This mortgage is based on the property's projected value, assuming all work is completed. Further, the mortgage now issued (up to the maximum allowable amount) is eligible for HUD endorsement as soon as the proceeds are disbursed and a rehabilitation escrow account is established. At that point, the lender has a fully insured loan.
In Mortgagee Letter 2005-19 from this past April 29, HUD acknowledged that minor repairs also could lead to the restimulation of single-family housing in a community. Starting this past June 4, it has offered the Streamline(K) Limited Repair Program, a variation of the standard 203(k) plan.
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