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FHA 203(k) – Understanding Its Real Value – Part 1

Many readers have requested a post on the FHA 203k program. I was lucky to meet Skip Schenker, a national expert and instructor on the subject, while we were both speaking at a conference in Dallas last month. I asked him to share some of his thoughts. Here is his contribution. – Steve Harney

The FHA 203(k) Renovation loan may be the most important, least known, and underutilized government loan that could save the Real Estate market in 2010 and Beyond…

The Perfect Storm

Over 2 million homes were foreclosed in 2009 and more are expected this year.  Property values have declined significantly, and many economists expect property values to continue to decline into 2011.  Many of these homes have not been maintained nor updated and have old or antiquated electrical, plumbing systems, heating, roof, insulation, windows, doors, appliances, etc.

Cash-strapped homeowners losing their homes convert their updated  air conditioners, heaters, cabinets, countertops, doors and appliances into much needed cash by selling them on eBay, Craigslist or at garage sales;  Vacant homes get vandalized for any remaining valuable items like copper wiring, plumbing, light fixtures, and switches.

According to the Harvard University Joint Center for Housing Studies, 1/3 of all homes nationwide are old, 25 to 45 years old; and another 1/3 of all homes are older, 45+ years old. Our aging housing stock needs to be updated, modernized, and retrofitted to utilize the advances our building industry have made in the last 15 years.  Lack of liquidity in the mortgage market and consolidation of the mortgage originators reduced the amount of funding sources for new mortgages.  Lenders of traditional types of loans including Fannie Mae, Freddie Mac and the standard FHA  consider these properties poor collateral and won’t fund loans unless the work has been completed and the home is habitable.

The Dilemma

When Banks acquire these homes through foreclosure, what are their options?  They know that a pristine home with new paint, carpet, appliances and crown moldings will sell fast and for top dollar.  Unfortunately, they don’t have the manpower to manage or the cash to invest the $20,000 to $35,000 to bring an old run down house to modern standards.  There also remains the risk of starting a rehab project only to uncover some larger more expensive issues that could compound the banks losses, not to mention the potential for additional vandalism once the work is completed.  First time and move up buyers are getting forced out of the market because these properties will not qualify for traditional financing due to the condition of the home.  This brings in cash-buyers who want a deep discount on the property, thus driving the prices down further.

The Solution

The FHA 203(k) Renovation loan, available as a purchase or refinance, established in 1978 by the US Congress to revitalize our nation’s housing stock was ahead of its time by about 30 years.  The authors of this loan program must have seen this housing market coming.  The 203(k) allows an owner occupant home buyer to purchase a home in need of repair and get funding not only to purchase it but also to fix it up in one loan.  It allows the seller to sell and close a home “As-Is” no matter how bad the condition is.  A home could be condemned, it could have a cracked slab or damaged foundation, code violations, fire damaged, leaking roof, or no kitchen.   The buyer can close it “As-Is” and include funds to fix up the home in one loan.

A Real World Example

A buyer finds a home in the right neighborhood, on a good street, but it is old and was vandalized.  The home is listed for $200,000 and needs a new electrical system, plumbing, heating, kitchen and bathroom remodel, paint inside and out, refinish the wood floors and carpet in the bedrooms.  The total repair cost is $50,000

Purchase Price: $200,000

Renovation Account: $58,000  (Includes 10% contingency reserve, Inspections and other soft costs)

Total Acquisition Cost: $258,000

Base Loan Amount: $248,970  (Buyer must qualify for a loan at 96.5% LTV)

Down Payment: $9,030  (Minimum down payment is 3.5%)

The buyer gets to make a wish list Once the property is inspected and any deficiencies and FHA required improvements are identified, the buyer gets to make a wish list of the home improvements they want to do to their home.  Dual pane windows, new entry door, interior doors, new paint, carpet, cabinets, countertops, appliances, add a second floor, a master bedroom, a bonus room, finish a basement, add units, upgrade the electrical, plumbing or HVAC systems; landscaping walkways, decks… its almost endless the types of improvements you can do…

In Part 2 tomorrow, Skip will cover some of the logistics of the process. He will also talk about the overall benefits the program creates.

Skip Schenker is the National Renovation Lending Manager at Benchmark Mortgage Inc. Benchmark Mortgage is a 10 year old mortgage banking firm located in Plano TX.  Skip, who also manages the Tustin, CA branch, has specialized in renovation lending since 1994; and has held positions at First Horizon, Wells Fargo, Bank of America and National Pacific Mortgage; He was a licensed contractor in the 1980’s.  Skip has spoken at industry conferences REOMAC, REOCON and has been teaching his continuing education class to hundreds of Realtors in CA since 1999.

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8 replies
  1. Jose S. Guerrero
    Jose S. Guerrero says:

    I enjoy reading your explanation of the 203K.

    Keep up the great work. If you don’t mind I would like to have your permission to make copy your writings and share them with Buyers, Contractors and Realtors here in Austin, Texas.

    Jose S. Guerrero
    HUD Approved 203(k) Consultant & CI.

  2. jeff
    jeff says:

    I’m currently in the process of being processed for a 203k loan on a hud home, I was wondering if it is difficult to find a contractor willing to work with this type of loan? The house I’m looking at I would need several contractors rather than just one licensed general contractor for everything. Also on some of the simple repair items such as painting, door hardware, installing light fixtures, are these allowed to be completed by myself rather than spending 2x money and having hired out?

  3. Dean Hartman
    Dean Hartman says:

    In today’s market, there is no shortage of contractors available. You need to make sure the contractor you choose is willing (and able) to wait for their money until AFTER they have completed work….because that is how the program works. Unless, of course, YOU want to front some money. Here, on LI, we have contractors we use regularly who know how the program works and it is not a problem.

    Typically, we recommend one general contractor (unless the borrower is very experienced) because getting approval (resumes, insurances, etc) for all the individual companies for plumbing, electrical, etc. is very burdensome.

    Estimates are required to cover a third party to do all work. If you do some of the “simpler” items, and save money, there will be money left in your account when finished which will be applied to reducing the principal balance on your loan (or maybe used to do more work).

  4. Mich
    Mich says:

    Do you have to use a consultant? Or is that just an option to make things easier? Does the GC have to be licensed? Can you be you own GC and just hire subcontractors? Who comes by and checks the work when it’s done to sign off and ok the draws?

  5. Dean Hartman
    Dean Hartman says:

    1. A consultant is mandated on a 203K (unless it’s a monir job done as a Streamline 203k).
    2. GC must be licensed AND bonded. If you are your own GC (which is frowned upon), EACH of your subcontractors must be licensed, bonded and prepared to execute all the appropriate documents.
    3. The appraiser and/or the consultant comes to verify the draw requests.


Trackbacks & Pingbacks

  1. […] Here is Part 2 of Skip Schenker’s two part series on understanding the FHA 203(k) and its real value. In case you missed yesterday’s, here is a link to Part 1. […]

  2. […] Here is Part 2 of Skip Schenker’s two part series on understanding the FHA 203(k) and its real value. In case you missed yesterday’s, here is a link to Part 1. […]

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