Fact:  There are a huge number of foreclosures on the market
Fact:  Many/most of these foreclosures need a lot of work
Fact:  If you’re not well-versed on the “ins and outs” of the FHA 203(k) program, now is the time to get started on that learning process.

  • An FHA 203(k) is a normal, traditional 30-year fixed-rate loan.
  • The interest rate runs about ½% higher than a normal FHA loan,
  • The same qualifying guidelines apply to a 203(k) as apply to a normal FHA loan:
  • Seller help up to 6% of the sales price
  • 620 minimum credit score
  • Gift money is OK for some or all of the needed cash

Which FHA 203(k) Mortgage?

There are two categories of FHA 203(k) loans…

  1. a streamline FHA 203(k) and
  2. a full FHA 203(k) loan

A streamline FHA 203(k) is simply where the total cost of the repairs runs from $5,000 up to $35,000…it is called a streamline because there is no need for a “HUD consultant” (see below).  The cost of the repairs is an agreed-upon price between the buyer and their contractor.

On a full FHA 203(k) mortgage, the repairs run more than $35,000…here, a HUD consultant goes out and tells the buyer and the bank what a reasonable cost should be for the repairs.  The buyer then has to Abandoned Housefind a contractor willing and able to do the specified repairs for that total cost.

The contractor must be a licensed contractor in the State where the property is located.  The mortgage company cannot allow Uncle Bob or your best buddy at work to do the job…unless they happen to have a valid contractor’s license.  The buyer chooses their own contractor.  The bank must approve the contractor, along with the buyer.  The mortgage company is  going to run his credit report…the mortgage company is going to check with his past clients and suppliers…and the mortgage company is  going to check to see how he has done on any previous FHA 203(k)  mortgages the mortgage company have done with him.

Foreclosure, Short Sale or “Plain Vanilla”

The property does not have to be a foreclosure…any house that needs work can use a FHA 203(k) to put the house back on its’ feet.

You can use the FHA 203(k) with the highly-popular Prince George’s County, MD Neighborhood Stabilization Program (also known as Down Payment on Your Dream).

If you use a direct lender you can count on 45 days for loan approval.  However, if you are combining a FHA 203(k) mortgage with the Prince George’s County, MD Neighborhood Stabilization Program, you had better count on 60-75 days, even with a direct lender.

The down-payment is 3.5% of the total cost of the job…not just 3.5% of the sale price.  For instance, if the house costs $150,000 and needs $50,000 in work, the buyer needs a down payment equal to 3.5% of the $200,000 total cost.

The beauty of the FHA 203(k) program is:

  • The buyer picks out their own paint and carpeting and flooring.
  • The buyer picks out their own cabinets, appliances and counter tops.
  • They renovate that home to their tastes and preferences.

In addition to the required items, the buyer can choose to have some additional work included in the FHA 203(k) mortgage.  For instance, the appliances might be OK, but they would like new, energy-efficient ones.  The counter tops aren’t bad or damaged, but the buyer would love some snazzy granite ones.  As long as the buyer qualifies for these extra items, and as long as the property will appraise OK with these extra items, include them in the plan.  After all, every $10,000 in repairs only adds about $60/month to the payment.

The appraisal is based on the “after-improved” value of the home…the appraiser will know what repairs will be done, and will base the appraised value on what the house will be worth once the repairs are completed.  As long as that appraised value is more than the total of the sales price plus repairs, we are OK.  This is what is so cool about FHA 203(k) loans, the sales price might be $140,000…the house needs $40,000 in work…so you have a total of $180,000…but the house will be worth $225,000 when you’re done!

All This and the Home Buyer Tax Credit, Too

Another thing that makes the FHA 203(k) attractive is that you can use this mortgage and still qualify for the $8,000 first-time home buyer tax credit or the $6,500 existing home owner tax credit.

  • The first time home buyer cannot have owned a home within the past three years and there are some are some other requirements.
  • The existing home owner must have lived in their home for the past five consecutive years and there are some additional requirements for the existing home owner as well.

Click Here for a great chart of the benefits and requirements of the home buyer tax credit program

Many thanks to Dick Harbin of Monarch Mortgage located in Greenbelt, MD for providing the information used in this blog post.