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Lending

Out with the old, in with the new

Home improvement loans can provide New Year’s hope for 2014

December 16, 2013
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Every year at about this time I start hearing from homeowners interested in making a change. In some instances, the change may be a desire to buy a new, bigger or nicer home.

In other instances it may mean remodeling or renovating an existing home. In either case, these queries start coming in during the holidays as people are considering goals for the coming year.

For many homeowners or homebuyers the want often exceeds the need or the financial capabilities. In these instances, I see a lot of frustration over the discrepancy of want and reality. In many cases, this frustration can be avoided through a financing alternative that is available, which allows a homebuyer or homeowner to obtain a loan and have the available additional cash to make the repairs/improvements.

This financing option is an FHA 203(k) “Home Improvement” loan. In my experience, most of the borrowers we speak to do not fully understand how they can benefit from these types of loans. That is why the process of identifying, evaluating and buying a “fixer upper” or a “Home Improvement” loan requires the right mortgage and real estate professionals.

From a borrower perspective, the most common questions I receive focus on trying to understand how they can qualify or obtain a 203(k) Home Improvement loan.

The eligibility requirements for both the property and the borrower to obtain a 203(k) loan are pretty straightforward. 203k qualification general guidelines include:

• Qualify with standard Federal Housing Administration’s (FHA’s) underwriting guidelines.

• Purchase own payment of 3.5% ----96.5% Loan-To-Value (LTV).

• Refinance down payment of 2.25%---97.75 Loan-To_Value (LTV)

• Loan amount and LTV based on after improved appraised value, which may result in “potential equity gain.”

• One time close mortgage that combines purchase or refinance of a property with rehabilitation costs (two loans in one).

At a time when rehabilitation lending for the new home buyer or existing owner should be at its height, many lenders have vacated the market due to transaction complexities and lack of infrastructure. Current market conditions are demanding a solution to the distressed and aging housing stock, creating an ideal environment for the 203k Home Improvement loan.

There are two basic types of FHA 203(k) “Rehabilitation” loans that provide the best benefit to borrowers:

• FHA 203(k) Standard: The Federal Housing Administration (FHA) 203(k) mortgage insurance program allows borrowers to purchase or refinance their home and include the cost to renovate it in the same loan. The Standard 203(k) enables borrowers to make a wide range of improvements including structural changes and additions to the building footprint.

• Borrowers can borrow against the value of their homes after the improvements are completed up to 110 percent of the future value. Typically, the required improvements are completed within 180 days of funding the first of several staged draws for these improvements.

• FHA 203(k) Streamline: Flexible credit qualifying permits homebuyers to finance up to an additional $35,000 into their mortgage without staged draws to improve or upgrade their home before move-in as part of a purchase or as part of a refinance. With a 203k Home Improvement “Streamline” loan, borrowers can tap into cash to pay for property repairs, improvements and to complete minor non-structural repairs.

The process of renovating a home begins long before contractors show up and start framing, dry walling, and painting. It’s important to make sure borrowers understand the process and know that they are working with a responsible lender and, when purchasing a property, a real estate agent who is knowledgeable about this type of transaction.

By educating borrowers and real estate agents, we can gain their trust while growing our individual businesses.

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