FHA 203(k)nocking down doors
Ira and Tegan Denison stand in their kitchen space before their 203(k) loan paid for a renovation.
The FHA 203(k) is the Swiss Army knife of loan programs.
Although it has been around for more than 30 years, many consumers –and even real estate brokers and loan agents – are unaware of its versatility.
Ira and Tegan Denison stand in their kitchen, after the 203(k) loan funded the renovation.
The program, the primary FHA loan for renovations and rehabilitation of homes, was launched in 1978. It takes its name from the 203 (k) section of the National Housing Act, which created the Federal Housing Administration in 1934.
Wide-range of benefits
The beauty of the loan is that it allows a wide-wage of benefits to home buyers, while still only requiring a 3.5 percent down payment for qualified buyers, like other FHA loans.
Buyers, at typically a slightly higher rate than a current FHA-insured loan – about 4.5 percent in today’s market – can roll all of their construction costs – big and small – into the loan. A rule of thumb is that each $10,000 rolled into the loan, typically raises the monthly payment by $53.
It helps homes appraise at a high enough level so they will qualify for a loan, which is especially important in this tough underwriting climate. For example, a kitchen renovation, funded upfront by the program, might make the difference between the housing appraising or not, at a nominal monthly increase.
Rescues trashed homes; greens them up
The program is a godsend for owner-occupants buying foreclosed or short sale homes that have been trashed. Increasingly, it also is being used to “green-up” a home with things as small as caulking, extra insulation and even solar panels. You name it and it can be cover the costs with one loan, whether you want to roll in the cost of landscaping, electrical work, roofing, gutters, tiles, plumbing, or even the installation of a well or a septic system into the 203(k) loan.
The vast majority of the handful of Denver-area lenders who offer it use the streamlined version, which has a $35,000 maximum loan amount, Universal Lending (a sponsor of InsideRealEstateNews) and Wells Fargo offer the full-blown version, which allows loans up to the FHA-limit of $406,250. In other words, while the full program won’t cover the cost of a high-end home that requires a jumbo loan, it provides far more than the typically priced home in the metro area, which is less than $270,000. Indeed, some borrowers have used it to purchase and gut the home, or even for a scrape off. However, the program is not currently available to flippers and investors, although there is talk some version of the program may be extended to them down the road.
“Amazing loan program”
“What an amazing loan program,” said Jocelyn Predovich, president of Limetree Lending Group, which is part of the Universal Lending family.
She said once real estate brokers and home buyers realize all it has to offer, they can’t wait to take advantage of it.
“It’s a matter of education,” said Predovich, the budding “Queen of the 203(k)”, who has written two e-books and hosted six videos on the loan program. “Clients and real estate agents just don’t understand the potential of this loan.”
Oct. 20 workshop
To help educate people, she is hosting a free workshop on the program from 9:30 a.m. to 11:30 a.m. on Wednesday, Oct. 20, on the third floor of Universal Lending’s headquarters at 6775 E. Evans Ave. Real estate brokers attending can earn two hours of continuing education credits by attending. Those interested in registering can e-mail Predovich at jocelyn@limetreelending.com.
Predovich said she typically closes 10 to 15 loans each month, and on average five of them are 203(k) loans. A month ago, she hosted a half-day conference on appraising homes, and addressed the loan program to about 75 real estate brokers, which led to her signing 13 clients who could potentially benefit from a 203(k) loan.
She said about 70 percent of those using them have been using the streamlined version, with the rest needing a bigger loan.
203(k) nets big bucks
The streamlined version was too anemic for Jennie Nash. She and her husband took out a $289,000 203(k) loan – $199,000 for the purchase of a home in Conifer and the rest for a major construction job.
They planned to live in the house for five years, but ended up selling it after a year. “Unfortunately, we’re going through a divorce,” said Nash, 48, who now is fixing and flipping homes.
“We put the home on the market in the middle of the week, and in three days we had an offer,” she said.
They bought the home as a foreclosure. It was originally 1,900 square feet and before the lender took it back, the previous owner was doubling its size.
“It was maybe 40 percent complete when we bought it,” Nash said. They used the loan to finish the kitchen, add drywall, extra insulation, finish a bathroom that had been roughed in, and prime and paint the exterior, as well as replace the electrical system.
“Tremendous opportunity”
“When we told our real estate agent what a huge project it was going to be, she said this sounds like a prime candidate for a 203(k),” Nash said. “We had never heard of it before. But what an amazing loan. There is no way we could have done this without the loan. It provided a tremendous opportunity for us.”
1st time buyers love it
At the other end of the spectrum were Ira and Tegan Denison, 28, and 27, respectively. They bought a home in the Seven Hills area of Aurora for just under $200,000, with about $15,000 rolled into it for construction improvements.
In addition to the 203(k), they were able to take advantage of the $8,000 tax credit for first-time home buyers.
“We had never heard (of the 203(k) before,” Tegan said. But when they found a home tri-level home that they loved, they were disappointed it didn’t appraise high enough for a loan.
The 203(k) came to the rescue, allowing them to tear out walls between the kitchen and living room and kitchen and dining room, really opening up their house. They also put in wood floors and installed new appliances and put an island in the kitchen, modernizing the home that still had a 1970s-feel.
“We love to entertain, so this is great,” she said.
Renovatining when buying cuts stress level
And although they had to live in a construction zone for about four months, it was well worth it, she said.
“We met with a contractor, he scoped it out and we gave him our vision, and he shared his vision with us, and priced out all of the materials and costs,” she said.
Even if they didn’t need the improvements to make the home get a high enough appraisal, it was well worth it, she said.
“What is really awesome is that we had it done right away, instead of scraping the money together and waiting 10 years to do it, like my parents did,” she said. “And the cost is very reasonable.”
She said she has passed on the virtues of the 203(k) to a number of their friends who are looking to buy a home.
Universal Lending leader of the 203(k) pack
The biggest player in the 203(k) world in the Denver-area appears to be Universal Lending.
Well-known real estate attorney, Oliver Frascona, last month said there are only a handful of lenders that offer 203(k) loans and without a doubt, Universal appears to be doing far more than any of the others.
Universal, including its affiliated companies, completes more than 200 203(k) loans annually, said Matt Ackerman, of Universal Lending. Loans, he said, have ranged from $5,000 to north of $250,00.
Still, it is a niche product, he said.
“I don’t think they’re ever going to be mainstream loan,” Ackerman said. “I don’t think they will ever even make up 10 percent or 20 percent of the market.”
For one thing, they take more planning than other loans. That’s because the buyer has to decide what construction projects it will include in the financing, get cost estimates for them, and then hire a contractor to do the work. And the contractor won’t be paid fully until the work is completed, so he has to be on board with the process.
A lot of work
“They’re a lot of work,” said Robert McGuire, a broker with Your Castle Real Estate. “They take more time for the lender as well as the home buyers.”
McGuire said that “Universal Lending’s name usually comes up first,” for the 203(k) program, but he said he has directed clients to other lenders, too, such as America’s Lending, which offer the streamlined version.
“I’ve never done a full-strength one,” McGuire said. “Honestly, I’ve never had a client who needed one.”
Ray Williams, of Summit Mortgage, also only offers the streamline version. So far, he said, that seems to be filling the needs of most his clients.
“I think the younger HGTV-generation, who watch shows like Renovation Realities, are the ones most familiar with the 203(k),” Williams said. “They aren’t afraid to get their hands dirty and are the ones most open to it.”
Still, buyers aren’t beating down his doors to sign on the 203(k) dotted line.
“Interest in them seems to come in waves,” Williams said. “A while ago, not too long ago, I might be doing three or four a month, and then I won’t do any.”
He said that he recently was approved by the Department of Regulatory Agencies to teach courses on 203(k) for continuing education credits, so he may be offering some workshops the program.
Hand-holding, knowledge crucial
Predovich, the lender offering the free workshop on Oct. 20, said that while the loans are daunting for a lot of lenders, she said she has it down to a system, and makes it as painless as possible for home buyers.
“We do a lot of hand-holding,” she said. “And we have our system down pat.”
Realtor used it herself
Another fan of the product is Kelly Bank, principal of the Bank Group at 8z Real Estate. (8z is a sponsor of this site.) Indeed, she has put her money where her mouth is.
“I used one on my own home,” Bank said. “And I’ve done a number of them for clients. It’s really a great opportunity to build instant equity.”
Easy to be green
Predovich said that one emerging trend is to use it to go green.
“This is the only loan product on the market today that will finance the cost of transforming a property into a green home at the time of purchase,” she said.
John Keene, an “eco-broker” with Live Green Real Estate, said that he hasn’t put a client into a 203(k) yet, but he is eager to do so, especially because of the green-angle.
“I work with an eco-broker, so I am interested in using them in a sustainable way,” Keen said. “I explain to people if they spend a little more for Energy Star appliances or more insulation, it will be worth it, as far as helping the environment and the economic payback. I could even see it be used for putting solar on your roof.”
Ackerman, of Universal Lending, said that one strategy is to use the 203(k) in conjunction with federal and local incentives offered for energy efficient products and improvements.
“I do not know if we’re going to see a whole lot of it used for solar, although we’ve had a few use it for solar installations,” he said. “More and more, leasing solar seems to becoming more popular than paying for it outright.”
And Bank of 8z Real Estate said that most of her clients who have used the 203(k) loans are first-time home buyers, who already are stretching to buy. “They are more interested in just qualifying for the loan, than any green features,” Bank said. “I would think that might be more attractive for the higher-end buyers, though.”
Would have, could have, should have
While it’s not exactly buyer’s remorse, Ackerman said that a lot of buyers become wistful about the loan program, when they hear about it after they have bought their home, and are now contemplating home improvements.
“I can’t tell you how many people have told me that they wish they had known about this program at the time they were buying a house” he said. “But it’s not for the faint of heart.”
Video: Jocelyn Predovich on 203(k) loans
Contact John Rebchook at JRCHOOK@gmail.com
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