Permissible Creative Financing Options

Creative financing options were readily available just a few years ago and were utilized by just about every real estate and mortgage broker that operated during that time; But the term “Creative Financing” meant different things to different people during the years that immediately preceded the mortgage meltdown. Although most or all of the creative financing techniques employed then are just about extinct now (example, “Stated Income/Stated Asset” or “No Income/No Asset” loans are not used in today’s market).

What isn’t extinct and will probably not be, as long as the US Government continues its support of the FHA mortgage insurance program, is a mortgage loan known as Section 203k Rehabilitation Loan which, in my opinion, was one of the most creative mortgage financing programs to have been introduced by any mortgage agency in modern times, and probably still is today. The 203k rehabilitation program (referred to also as 203k rehab or just 203k by many mortgage professionals), introduced by HUD during the early 1980s was a badly administered loan which presented too many problems for real estate brokers and mortgage lenders and had to be shelved. Industry professionals thrashed the program and called for its improvement.

It wasn’t until the early ’90s that the 203k rehab program was reintroduced to HUD-Approved lenders as a viable financing option for the purchase of one-to-four family homes and owner-occupied mixed-use properties. In fact investor-owners were permitted to purchase residential and mixed-use properties (until that part of the program was discontinued in 1996) as long as the down payment was a minimum of 15% of the purchase price or of the appraised value – whichever was less. This version of the 203k rehab program did in fact provide “creative financing options”, and there were many; All options were encompassed within HUD’s guidelines so they were permissible and therefore eliminated the need to use your own creative ideas.

This excerpt from HUD’s website was particularly encouraging for me:

The Section 203(k) program is the Department’s primary program for the rehabilitation and repair of single family properties. As such, it is an important tool for community and neighborhood revitalization and for expanding homeownership opportunities. Since these are the primary goals of HUD, the Department believes that Section 203(k) is an important program and we intend to continue to strongly support the program and the lenders that participate in it.

I interpret that excerpt to mean that any home buyer who wishes to can utilize the 203k rehab loan program to finance the purchase of a qualifying home and utilize the creative financing options featured in the program as long as s/he applies with a lender that is capable of originating and processing the loan in a manner satisfactory enough to actually bring the transaction to a title closing. Bear in mind that not every lender will offer the program and many lenders that are willing to originate, process and close a 203k loan must still rely on a bigger bank to purahase the paper which has also been – at times – problematic for smaller lenders.

The party who benefits most from a 203k rehab loan is the home buyer in almost every respect except that the home seller gets to walk away from a home that may be in need of considerable repair or rehabilitation without the headache of making those repairs; although in many cases the disrepair state of such a property would have been negotiated in the price (a reduction) thereby eliminating any monetary gain the seller may receive; so the seller benefits only in the sense of not having to complete the work.

The buyer of a 203k financed home benefits in several respects. S/he is able to choose the style of work to be done; Whether room sizes will change or remain the same; Whether the number of units will change or remain the same; From reduced out-of-pocket costs; No loan payments up to six (6) months after closing (if the property is uninhabitable); If a mixed-use property, conduct a business in the retail space; Should the property appraise for less than required value, the ability to increase the loan amount up to 110% of the after-improved value.

Most importantly, the buyer can occupy and live in his/her new home with the security and peace of mind in knowing that there will be no breakdowns of the home’s major working components requiring emergency spending, which in turn creates uninterrupted mortgage repayments. Each of the features mentioned above was also available in the 203k program since its reintroduction in the early ’90s and could have been utilized to a greater extent by many home buyers who ended up with subprime loans – most of which turned out to be their worst nightmares.

Almost every creative manuever that was used to get a home buyer into a subprime mortgage (most of which were fixed for very short terms before adjusting into a “monster” payment), could have been turned into a permissible creative financing option by applying a little patience and a lot of empathy towards the buyers. The Section 203k Rehabilitation Loan program may still be a viable alternative in today’s real estate market, despite its depressed state.

A message to Prime Mortgages readers:

Thank you for your support. We will continue working to provide the most relevant and useful information about current FHA-insured programs and related topics. Please provide any comments, opinions or preferences which you would like us to be aware of. Thanks and God Bless!


For more about 203k, please visit the HUD website

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