by Michele Gillis
Staff Writer
Changes in the remodeling market have brought old loan options to light.
Many lending companies and banks including are offering the 203k loan and a conventional remodeling type of loan to their customers to help offset some of the costs of buying a home in disrepair or in need of an update.
“Given the current market wave of foreclosures across the nation, a large number of properties for sale involve foreclosures,” said Bill Sharp of Sharp Mortgages. “Given this type of sale, most of these properties are sold by the lenders in their current condition, which often is in a state of disrepair.
“Most lenders do not want to spend money to repair the properties and become property managers. These circumstances have warranted the 203k to be a more utilized product, allowing buyers the opportunity to purchase homes that need such repairs.
“Without this product, you may not be able to easily find the necessary financing for the acquisition of the property.”
The 203k is a government loan that allows the customer to remodel and renovate all the way up to 110 percent of the appraised value. There is also a conforming version allows the consumer to borrow up to 75 percent of whatever the home is worth.
“While most borrowers would fit into a conforming loan amount ($417,000) we do have capabilities of doing jumbos (over $417k) on this program as well,” said Sharp.
Sharp said there are essentially two types of 203k’s....streamlined and standard. The streamlined is for repair amounts $35,000 and below and for minor non structural repairs. Standard is more for structural and significant repairs/additions.
Wells Fargo is also offering a Purchase and Renovate loan and a Refinance and Renovate loan to its customers. Though they been available all along, there just wasn’t as large of a market for it as there is now.
In addition, they are offering the 203k Express, a streamlined version where the customer can borrow up to $35,000 for repairs, and a Renovation Express, a program specific to Wells Fargo
Derek Emerson, a loan officer with Wells Fargo, said the 203k loan has been available since the 1960’s, but there’s never been a big need because most of the time there has been appreciation on homes.
“Homes have gone down in value and created a lot of foreclosures and short sales,” said Emerson. “It’s like now people are saying this is a great program, but it has been here the whole time, but no one knew about it because no one needed it.”
The amount your customer may qualify for is based on the expected value of the home after improvements are made.
“For instance, if you buy a home listed for $100,000, you could spend up to $75,000 on renovations,” said Emerson.
Wells Fargo markets to the real estate agents so they can tell their customers about the product.
“We try to educate them on the programs and it helps fix a huge niche out there due to all the distressed properties,” said Emerson. “We are going to try and solve that problem and get all those properties fixed up.
“In the meantime, it’s a win-win because the customer usually comes out with at least 25 or 50 percent equity in a home. It’s pretty amazing. The problem is that when you walk in a home, you have to foresee what the property can be.”
The FHA loan limit is $387,500 and the conventional loan limit is $417,000.
“I think we found a great niche in the market because there are so many short sales and foreclosures now. A lot of times, when people leave these homes, they are desperate and they need their money, so they take their appliances and anything else they can take with them,” he said.
Emerson said he knew of a builder whose company went out of business and completely cleaned out his model home, leaving a lot of work to be done.
“He took the air handlers, pool pump, light fixtures and light switches,” said Emerson. “he took everything he could and sold the stuff in a garage sale.
“It was a good scenario for the buyer. The house was in Mandarin and she paid $350,000 for the house and did $35,000 in renovations and the house appraised at $450,000. So, they had $380,000 into the house and it was worth about $450,000.”
The loan is not only for distressed properties.
“Realtors can also use this product to sell location, location, location,” said Emerson. “A lot of times people want the best school district, but everything in the house they like is so dated.
“The Realtor can sell the house and hopefully, the buyer is getting a good price, so they can go in there and remodel the bathrooms and kitchen. They can use the renovation loan on a normal house that really doesn’t have distressed items and upgrade it to where they are comfortable.
“It’s kind an alternative to buying a new house because you can build your house the way you want it with the renovation loan.”
“The benefits of these products are that they are a great deal,” said David Wakefield of Primelending. “They allow the ability to buy a house that needs repairs that would not pass minimum property. They allow a buyer to hold onto their savings while they fix up the house. The FHA loan will require less out of pocket than its conventional counterpart. Instead of doing a personal loan later, adding the repairs to the mortgage will most likely get a better rate of interest on the entire amount due. The appraisal is done on the ‘after repair value” and assumes the work has already been done.”
Wakefield said this type of loan allows Realtors the ability to sell more of a house.
“It removes the obstacle that buyer might have about the condition of the house, the agents can sell more listings, overcome objections and ultimately attract more buyers and listings. They can close now and fix later. The loan closes and then the work is done, money is set aside in an escrow account.”
Michael McLaughlin of North Star Mortgage said there are several benefits to either the FHA or conventional repair programs.
“The main benefit for either is being able to wrap necessary repairs and even cosmetic updates into the borrower’s loan versus as an out of pocket expense for either the seller or the buyer,” said McLaughlin. “Any loan program will have minimum property standards as determined by the appraisal process and also through home inspections. Many properties, for a multitude of reasons, do not always meet loan qualification standards at the time of application. Depending on the magnitude of the condition of the property, these programs can help both seller and buyer complete a transaction where repairs are needed in order for the property to be habitable.”
McLaughlin said these programs have become an extremely vital and important part of the lending business since the decline of the real estate and credit markets a couple of years ago.
“Florida has been one of the hardest hit states as far as foreclosures, short sales and other issues tied to the markets,” said McLaughlin. “Many bank owned properties are sold ‘as is’, meaning the owner, who is now the bank, will not pay for, or make any repairs to a property. Since many previous owners did not leave these bank owned properties in the best of shape for various reasons, the 203k and Repair Escrow loans are key in getting the buyer the ability to finance necessary repairs into the loan when a seller is either unable or unwilling to make repairs that might be necessary in order to proceed with a purchase transaction.”
Keven M. Brennan of American Home Funding Inc. said the 203k loan is very important to his business in this market.
“In this market, with the high number of foreclosures and distressed properties, I need to have this tool in the box,” said Brennan. “The 203K is flexible enough to allow both quick, small, repairs needed to comply with the minimum property eligibility standards as well as large scale remodels.”