An Old Mortgage with a New Life

This high foreclosure rate that has overtaken the market recently is really a good news/bad news story. Of course, the bad news is obvious: families have lost their homes. The good news, however, is that there are a huge number of homes on the market that may be very affordable. Banks are in the business of lending money and the last thing they want is to own YOUR real estate, so very often there are some pretty good bargains to be had.

The down side is that although the bank may know what to do with your money, it seems they haven’t the foggiest notion what to do with a house, so the condition isn’t always pristine. Not to mention (and I know this may come as a shock) sometimes the previous owner, who is none too happy about losing his home, spends a little time devaluing the property, if you know what I mean. In a recent case, the former owner took the time before departing to disconnect all of the traps under the sinks, tear out the banister to the second floor, destroy what appeared to be a relatively new dishwasher and rewire the thermostat so that the air-conditioning wouldn’t operate. Clever!

I say all of this just to enlighten you to the fact that a great deal may come with some work required. But never fear, there is a remedy. It is called the FHA 203K mortgage. As a mortgage product, it has been around for decades, but it has never been more useful than it is right now. What the ‘K’ loan does is provide the funds needed to purchase the house and rolls into that loan the funds you need to renovate the home as well. Couple this with a very reasonable down payment requirement of about three percent and you have a darn near perfect mortgage program.

So how does this work? Much more easily than you might expect, given that it is a government program. First go house hunting with you favorite realtor, just as you would for any other property. Once you’ve found the house, negotiate the price just as you normally would, with the exception being that it will be subject to you obtaining FHA 203K financing. This should not be alarming to anyone; the ‘K’ loan can still be closed within 45 to 60 days, provided you have a mortgage lender who knows what they are doing. Your realtor’s guidance here is invaluable. Not every lender who does FHA loans WILL or CAN do a ‘K.’ Look for experience here—the 203K is not for the novice.

Once you have negotiated your purchase, you must begin the process of accumulating the bids for the work you intend to have done. Your best bet is to hire a general contractor who can pull all the pieces together for you, although it is acceptable for you to hire the individual trades yourself and oversee the process. Whichever way you do it, the bids should then be submitted to a HUD-approved plan reviewer who will evaluate the bids to validate that the work can be done for the costs provided. Once you receive his okay, the costs are rolled into the cost of the purchase and the mortgage amount is determined from that combined sum.

Understand, the work doesn’t have to be done prior to settling the loan, so the seller will have no objection to the concept. The home will close in what would be considered a normal length of time and the work will commence subsequent to the closing. The work can be as extensive as a total home renovation or as minor as a paint job and new windows. In fact, if the plan is for modest cosmetic improvements, your lender will recommend a streamlined 203K, and you will avoid most of the hurdles associated with the program and race straight to the finish line.

A common misconception about the program is that it exists primarily to rebuild homes that are about to collapse and that it is to be used to renovate low-end properties. Nothing is further from the truth, although the ‘K’ can certainly be used for that. But it is most useful when one simply wants to update a stale old property. Let’s say that the only thing keeping you from buying a gracious old $200,000 home in a nifty tree-lined community is an outdated kitchen and bath. Do a ‘K,’ roll the cost of the upgrades into your 30-year mortgage and enjoy the charm and grace of the older property along with its modern improvements.

It is truly a wonderful program, so it’s hard to imagine that came from the same government agency that gave us the FHA 235 and 245 programs that sent borrowers in droves into foreclosure. It is a product that works and is unfortunately underutilized. Look into it – it could be just what you need.