203 K Lenders
U.S.Department of Housing and Urban Development (HUD) offers urban rehabilitation and renewal loans through its Federal Housing Administration department. This loan is more famous as 203 (k) Loan. Oftentimes, a home buyer likes an existing house. The home buyer visualizes some renovations to this house that can increase its value substantially.
However, bankers do not finance the additional costs towards home repairs and renovations because corresponding increase in the value of the asset, as being projected by the home buyer, is not certain. This diminishes the demand for many old buildings and not so old buildings, and these remain as old and dilapidated homes amidst new and comparatively modern houses in the surroundings.
To overcome this problem, U.S. Department of Housing and Urban Development came up with a new loan through its Federal Housing Administration (FHA). This loan is granted under Section 203 (k) of National Housing Act, by lenders who have been approved by the department to process such loans. These loans are insured by the department.
The onus of examining the property title, value and home buyers repayment capacity falls on the lenders.
FHA 203 K loans are granted only for repairs, purchase, and or renovation of existing homes for not more than four families. Though this is the criterion set, the general interpretation of this is single-family homes. The object is to renew and rehabilitate existing houses as envisaged under Community Reinvestment Act, and NHA.
FHA 203 K loans can be combined with home finance being provided by nonprofit organizations, local housing and state housing agencies.
Lenders also club FHA 203 K loans with other home finance schemes of HUD including HOPE and HOME. Apart from these, there are Community Development Block Grant Programs that are designed for rehabilitation of such homes. The difference between conventional housing loans and 203 (k) loans is that in 203 (k) loans, the lender provides home finance for the existing house as well as required renovation, preservation, and repairs. In other words, the conventional home loans are confined to a ratio of purchase cost of the house, but in 203 (k) loans, the home buyer becomes eligible for additional costs towards rehabilitation works as well, which are mere projections. There is a risk element involved here. The borrower may choose not to implement the works, in which event, the house mortgaged for the home loan, will not fetch adequate price if it has to be sold out to recover the dues. This risk is borne by HUD and the lender is insured against it. Not all properties are eligible for FHA 203 (k) loans. Since it is the lenders responsibility to get the documents, the following criteria must be kept in mind.
- The number of families residing in the home should not exceed four.
- The construction of the homes should conform to the rules and regulations set out in local zoning regulations.
- The age of the property should not be less than one year.
- Homes that are required to be demolished in part or in whole, during the renovations are also considered for such loans. The provision here is that the foundation and infrastructure is kept intact.
- This type of home loan can also be used to increase the number of dwellings at the site. For example a single family home is standing on the site. This can be increased to three or four family home. Similarly, if an existing multi-family home exists on the site, and the home buyer proposes to demolish it and convert it into a single family home, he would still be eligible for this type of home loan.
- If any new construction is undertaken, and the loan is being sought for that construction as well, then such construction should form an integral part of the existing home and not a separate construction. In other words, constructions that are more of co-operative dwelling units are not eligible for such loans.
The list of criteria furnished above is not comprehensive. There are other provisions relating to relocation of existing houses, eligibility based on land use, provisions relating to condominiums, etc. , as well.
Not every improvement is acceptable under 203 (k) criteria. The loan is not granted for items that do not become integral part of the home, or improvements that can be termed as luxury modifications. In general, painting, additional construction, energy saving modifications, safety related constructions, etc. , are eligible for 203 (k) loans. In fact, some improvements are mandatory. These include improvements for energy saving, insulation of ventilating, heating, and air conditioning systems, and smoke detection systems.
There is a ceiling on the quantum of loan that can be granted under 203 (k). For this, values are determined based on existing structure and anticipated value the renovated home would fetch after completion of improvements. The difference in two values is the maximum amount that will be given to home buyer as loan.
Sometimes home buyers require the loans after having bought the properties. Even these home buyers are eligible to apply for 203(k) loans, provided they apply for the loan within 6 months from the date of purchase of the home.
Other criteria that a 203 (k) lender must inspect include stipulations related to architecture of the renovated home.
The lender is required to deposit the quantum of loan the home buyer is eligible for in a Rehabilitation Escrow Account. HUD insures this amount, which is periodically released by lender in proportion to the works completed. Inspectors approved by HUD do inspection of the works completed, before such release of funds by the lender. The lender is required to hold back 10 percent of the amount from each installment released from the Rehabilitation Escrow Account. This amount is released only after final inspection of the rehabilitation works.
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