FHA 203(k) loans can provide funds for major and minor upgrades alike

Ginger Bell, education specialist, Go2Training

As published in Scotsman Guide's Residential Edition, March 2012.

Imagine this scenario: a home has been on the market for more than six months without an offer. The sellers are anxious, and their agent isn’t sure what to do. “Remodel the kitchen and replace the countertops and cabinets,” their Realtor may instruct. But how can the sellers be sure they’ll select colors and styles that potential homebuyers will like?

If this dilemma was shared with a mortgage professional who has experience with the Federal Housing Administration (FHA) Section No. 203(k) loan program, the solution may be deceptively simple. A 203(k) expert may suggest that the owners choose a few different countertop and cabinet samples and then place these samples in the kitchen before the next showing, complete with a sign that tells potential buyers, “You choose.”

This mortgage professional knows what today’s prospective homeowner wants when it comes to upgrading a property: choice. And that desire isn’t entirely surprising — across the nation, homebuyers are finding that many properties on the market are in dire need of upgrades or repairs. Short sales, foreclosures and homes that have spent too much time on the market can often be in desperate need of a makeover.

One of the biggest challenges for borrowers, however, is the fact that they often can’t afford to remodel right away. It can be difficult to have enough funds to cover the cost of a home purchase in addition to the cost of repairs and renovations.

That’s where the 203(k) program comes in. It’s designed to help borrowers refinance, repair, remodel or renovate their new homes — all with a single loan. Mortgage professionals shouldn’t let themselves be misled: the 203(k) is not just a rehab loan. Oftentimes, it can simply allow your clients to replace an outdated kitchen or bedroom, even if they don’t have enough direct finances to tackle such jobs.

The process works like this: After the purchase transaction closes, funds are kept in escrow and delivered via a draw process that finances any repairs or upgrades that need to be completed, as agreed upon by contractors. If the loan is a Streamlined 203(k), it can provide up to $35,000 for remodeling or upgrading a home.

203(k) loans may also appeal to clients who are interested in green-lending programs. Green-lending has been receiving a lot of attention in recent years, as more and more consumers come to realize how energy improvements can lower the cost of homeownership by lowering their utility bills.

With this in mind, the FHA offers insured Energy Efficient Mortgages (EEM), which allow homebuyers to cover some or all of the cost of qualified energy-efficient improvements in existing homes and those being built.

What’s key for mortgage professionals to note, however, is that EEMs can be combined with 203(k) loans. This can provide even more funding for energy-conscious borrowers, a fact that may make 203(k) loans more intriguing to your clients.

Although the 203(k) program can be a great fit for first-time homebuyers, borrowers don’t necessarily need to be first-time buyers to obtain a 203(k). This program can be an important tool for many of your clients and, furthermore, can be a great resource for clients interested in neighborhood revitalization, as well. If choice is what borrowers want, 203(k) loans may be exactly what your clients are looking for.

 

Ginger Bell, an education specialist with Go2Training, develops training programs for many companies, including Plaza Home Mortgage, OnlineEd and Mortgage Success Source. Formerly with Dale Carnegie Training, Bell has more than 20 years’ experience leading public-speaking, leadership, customer-service, sales and continuing-education workshops. Bell is a Nationwide Mortgage Licensing System (NMLS)-approved instructor and has received education awards from the California and Oregon associations of mortgage professionals. Reach her at ginger@go2training.com or visit www.go2training.com.