Utilizing 203k Mortgage money in a Post-Subprime Market

A few helpful hints!

  • Problem: Real estate values have declined in most markets
    Solution: The 203k mortgage program can help by providing 110 percent financing.
  • Problem: Due to foreclosures, the inventory of homes for sale is at all-time high
    Solution: The 203k mortgage program can help by requiring as little as 3.5 percent borrower investment
  • Problem: Many foreclosures are owned by banks. They may be vacant, boarded-up, vandalized, and in disrepair
    Solution: The 203k mortgage program can help by providing rehab funds included with the purchase money mortgage
  • Problem: With credit frozen and slow to thaw, the housing market needs a boost back to recovery.
    Solution: The 203k mortgage program can help by providing financing for every one-to-four family residential home or mixed-use property that qualifies.

During the first quarter of 2009 there were 348,000 new single-family homes sold, down 10 percent from the 388,000 homes sold in in the fourth quarter of 2008 and down 38 percent from the first quarter of 2008. Today’s real estate market is obviously not in good shape.

Borrowing requirements have stiffened which means that qualifying guidelines have become more restrictive. The reason for these stricter standards are understandable from a lender’s viewpoint because lenders cannot – in the aftermath of a crushing sub-prime crises – consider risky loans as acceptable assets.Lessons were learned from Subprime!

The Federal Government, through its Housing and Urban Development (HUD) agency has introduced several programs (FHA-Secure, TARP, HERA, H4H, etc.) designed to address specific problems of those homeowners already experiencing difficulty with their mortgages. Other government programs already in existence were modified (maximum mortgage amounts increased substantially) in order to help jump-start the sluggish housing market. One such program is the FHA-insured 203k mortgage financing program which goes further than most other mortgage programs in addressing many of the current real estate and mortgage related issues.This program is probably under-utilized!

Depressed values

Let’s discuss a few of these problems, starting with declining markets where home values have decreased by as much as 12 percent in the first quarter of 2009 when compared to the same period in 2008. One feature of the 203k mortgage loan provides for a Loan-to-Value (LTV) of up to 110 percent of the “after-improved value” of a home financed with 203k funds.

It seems then that, all things considered, there is a real opportunity to reduce the 12 percent drop in home value by up to 10 percent with the use of this program to make the purchase. Most HUD-approved mortgage lenders can provide additional specifics on how to achieve this objective. Mortgage Bankers specialize in FHA lending programs!

The home foreclosure rate, although it has slowed, continues to be a major problem for banks servicing these mortgages as well as the mortgage insurers, including the FHA which endorsed a total of 468,057 mortgages in 2008, an increase of 31 percent from 2007, and FHA endorsements totalled 430,846 mortgages in first quarter 2009, up 55 percent from the first quarter 2008 so the growth in mortgage applications endorsed by FHA is evidence that these programs have begun to fill the huge void created with the collapse of subprimes.

One way to increase the temperature and hasten the pace of mortgage application growth is to utilize 203k financing which requires a borrower investment of only 3.5 percent and therefore will help to ease the way for cash-strapped borrowers who want to purchase homes. In addition, the same loan can be used to make needed repairs which will eliminate, or at least reduce the occurrence of mechanical breakdowns or other costly repairs which can occur during the first year of homeownership. Reduced Emergency Repair Expense Shock!

“Unboard” the residences

When banks foreclose on a home it becomes a part of the their housing inventory, an asset which must be protected and insured until a buyer makes an acceptable offer and purchases that home. During the time between acquisition (by the bank) and resale of the home, several steps must be taken to make the now-vacant property insurable, and the very first step in most cases is to install security boards to the doors and windows reinforced with chains and padlocks to prevent vandalism and keep unwanted visitors from gaining access. Remove the boards, one-by-one!

Although a home buyer may be able to purchase one of these homes at a bargain price, he/she should perform needed repairs before or during the purchase in order to restore the property to habitable condition, because some foreclosures can stay unsold and vacant for extended periods.

To insure that repairs are done in a reasonable and acceptable manner, the purchase should be made utilizing FHA-insured 203k financing under which the property must be brought into good enough condition to meet HUD’s “minimum property standards” before taking occupancy. Bargain price, excellent condition, great deal!

We’ve heard that there are signs and glimmers of improvement in the economy and although that may be positive news, credit is still frozen and slow to thaw. This freeze affects the mortgage market somewhat differently than other markets in the sense that home values rise and fall proportionate to the availability of mortgage money to finance purchases (similar to the process of supply and demand).

It is a well-known fact that in a tight money market (some say buyer’s market), home prices decrease, and when credit is readily available home prices go in the opposite direction, so not only is the credit freeze making it difficult for people to purchase homes, it is also driving home values downward. One option available to home buyers that may help to thaw the freeze is to insist on FHA-insured 203k financing for any home they intend to purchase. Many realtors are approved to sell HUD foreclosures!

Repair, Rebuild, Redesign, Renew

Any house that does not qualify as “new construction” and fits the description of a one-to-four family residential property will probably display some wear and tear as a result of use and occupancy, and therefore may contain enough defective and disrepair areas to require five thousand dollars ($5,000) of needed repair work. That is one of the first qualifications – where the property is concerned – for obtaining a 203k home loan. The list of repairs permitted by HUD consists of a wide variety of items. Please see the complete list of allowable repairs on the HUD website. Making repairs upfront is a budget-friendly act!

In the current housing market finding a home for sale in a preferred location should not be as difficult as it was a few years ago, but transforming that house into an ideal home may be a different matter. Creating a warm, comfortable and suitable family dwelling can be an expensive proposition, but with the FHA-insured 203k mortgage program, there’s no need to worry, because with 203k funds, any house can be transformed into an ideal home at a very reasonable and affordable cost.

In fact, this is the only program that allows a home purchaser to include repair costs in the loan, thereby stretching payments over the entire loan term (thirty years in most cases). A win-win combination!

Not only can purchasers rebuild properties to meet acceptable standards, but the possibility of completely redesigning these properties to truly make them into their dream homes definitely exists and, if undertaken properly, several objectives can be met simultaneously.

Many a home was lost due to substandard conditions and disrepair, having been sold to decent hard-working folks who expected their homes to be in good and habitable condition only to find out – after the fact – that the homes they bought were in total disrepair, but that’s a story for another time. Expectancy of value for one’s money is not debatable!

Renewing neighborhoods that suffered loss of equity due to too many foreclosures and therefore resulting in too many “upside-down” residents cannot be accomplished overnight, but if each home buyer insists on utilizing one special government program with it’s many features, we’ll have a good chance of getting it done. Improving the housing market one home at a time!


Statistical information used for this article was obtained from U.S. Housing Market Conditions report, 1st Quarter 2009.
Additional information obtained from the “Interim Report to Congress on the Root Causes of the Foreclosure Crises”
Some figures above calculated at seasonally adjusted annual rates

As of July 1, 2009 a recent housing initiative was expanded to allow Las Vegas borrowers who are up to 125% underwater on their mortgages to seek mortgage refinancing. Thanks to the Making Home Affordable program!