Shea and Michelle Carlin recently had their eyes on a two-story home with an expansive balcony in Florida.
As is often the case with foreclosures, the previous owners pilfered the entire kitchen and all the light fixtures. The Carlins couldn’t afford the $46,000 in repairs, and banks wouldn’t lend them the money to buy the house until the repairs were completed, a Catch-22 common in the foreclosure market.
Their dream home could have slipped away.
Then they heard from their Realtor about a government program that would allow them to buy the house without needing bundles of money in advance. It let them roll the repairs into their total mortgage.
The little-known and once seldom-used program backed by the Federal Housing Administration has caught fire as of late. Nationally, the numbers increased nearly 700 percent since 2006.
“We could’ve never afforded the house,” said Shea Carlin, who now plans to move into the 4,700-square-foot house in March. “We didn’t have $50,000 lying around.”
The program, officially called 203k Rehabilitation Home Mortgage Insurance, started decades ago. The FHA insures the loan, including the additional money for renovations and repairs. The government backing encourages banks and other lenders to greenlight the loan.
The loans require only a 3.5 percent down payment and come with lower income and credit restrictions than conventional loans.
“It’s blowing up,” said Andy Wood of American Mortgage Services in Tampa, Fla. “The program is unbelievable. It has been sitting there forever.”
Still, many buyers and real estate professionals don’t know about the program.
Wood wants to change that. He is certified by the U.S. Department of Housing and Urban Development, which is responsible for the Federal Housing Administration, to educate Realtors and teaches a free monthly class. Classes are swelling, he said.
The loan insurance program is HUD’s primary option for rehabilitating and repairing single-family properties. The loan limit is $292,500 and can be used only for owner-occupied houses. Investors cannot apply. Properties with four or fewer units can be financed using the program as long as the repair money is used for the owner’s unit.
The renovations must meet HUD standards for energy improvements like heating and air conditioning, window caulking and weather stripping. Buyers can even use the loans to make cosmetic upgrades, including new floors and appliances. HUD offers several levels of financing depending on the cost of renovations.
After the loan closes, money for repairs and renovations is deposited into an escrow account and monitored by a Federal Housing Administration consultant. Contractors cannot access the money until they complete the work.
The program has an additional benefit: Buyers often walk into a home with instant equity, thanks to completing repairs on an undervalued home.
Downsides include more paperwork and inspections. Finding a lender who offers the program can be difficult. And reliable contractors can be hard to find, too.
Wells Fargo partnered with Home Depot, Lowes and Sears and created a “Remodel Express” program to purchase, refinance or remodel a home.
The retailers find contractors for the work. The lender screens the contractors to ensure they are licensed, insured and not fly-by-night companies.
“We know the contractor is going to finish the job,” said Donna Dalton-Hurst, a Wells Fargo renovation specialist in St. Petersburg, Fla. “There’s very few people who do this.”
Many Realtors, Dalton-Hurst said, won’t tell clients about the program because the closings often take about 90 days, much longer than for conventional loans. She urged real estate professionals to use the program .
“This is going to help with moving more properties,” she said. “Why would you turn your nose up at it? You’re losing customers.”
