Can you spend more than $35,000 for repairs on a FHA 203(k)?

Of course you can.

I picked up a couple of loans this week from south Florida. Both are educated repeat borrowers and were knowledgeable concerning their renovation needs for their proposed purchases. Each had numerous conversations with local lenders who told them that $35,000 was the most that FHA allowed for repairs on a 203(k) loan. After several conversations with my customers, I realized that not one of their lender contacts had any idea that a Standard 203(k) loan existed.

Many lenders today originate only the Streamline 203(k). The Streamline was created in 2005 to handle smaller rehab projects that could be handled by two or three specialized contractors (roofs, siding, windows, decks, etc.). Over the past five years, many lenders began originating the Streamline 203(k) because the loan does not require an FHA 203(k) Consultant, has a $35,000 cap on renovation cost, and funds can be disbursed with two draws. However, many lenders only make the Streamline product available to their customers and choose not to deal with the more detailed and time-consuming Standard 203(k).

The Standard 203(k) allows for up to five draws, six months to complete repairs, and the renovation cost is capped in relationship to the appraised value/maximum FHA loan limits for the area. My largest repair escrow has been $138,000; the Florida deals will be between $60,000 and $80,000.

Getting the word out about the (k) is good for all parties, but not taking the time to understand the program's parameters is just a sad note for our already beaten-down industry. I wonder how many borrowers have been getting the same limited funding advice and thus have walked away from a potential home that needed more than $35,000 in repairs.

If you choose to call a local lender, ask them whether they supply both the Standard 203(k) and the Streamline 203(k), and remember we are only a phone call away at http://www.203kkc.com/.

National Association of the Remodeling Industry 203(k) article

I was recently interviewed by the National Association of the Remodeling Industry's writer for its series Tuffin’ It Out. The article, "Market yourself as a qualified 203(k) contractor," focuses on how contractors should take time to contact 203(k) lenders like myself to gain 203(k) approval and then use that designation as part of their marketing plan. If you were to ask ten 203(k) lenders who is their focus of attention when originating 203(k) loans, I believe most would say "realtors," followed by "borrowers." I would agree that these two pieces of the pie are extremely important, but there is a vast network of contractors and construction vendors who are sitting on a gold mine of potential deals but have little or no understanding of the program. Take a look at the article, and for more details on the 203(k), visit my website — 203kkc.com — for more information.

Thanks again to the NARI staff and its more than 8,000 members for allowing me to contribute to the series.

FHA will change mortgage insurance premium on September 7, 2010

In a memo released on Thursday, FHA commissioner David Stevens announced that it is their intention to make changes to the current mortgage insurance fees effective with new case numbers ordered on September 7, 2010. The upfront mortgage insurance premium will decrease to 1% while the monthly premium will rise to .85-.90%. Final details will be release once President Obama signs the bill into law.

Currently a 30 year loan has an upfront MIP of 2.25% with a monthly premium of .55% (FHA waives the monthly mortgage insurance for all 15 year loans with a loan-to-value at or below 90%). Without more details it is hard to compare the changes at this time but it would not seem logical that the change is an overall increase in fees.

A case number is requested from FHA once a property is identified by the borrower. If you are looking for a home or thinking about refinancing now maybe the time to act. Mr. Stevens also notes that he hopes congress will act on additional legislation after congress returns from their August recess. Another major change in that piece of legislation is lowering the maximum amount that a seller's can pay toward a buyers closing cost (seller's concession) from 6% to 3% of the sales. Fannie Mae and Freddie Mac have already made this change to  conventional loans.

Where do I find an FHA-approved contractor?

A few weeks ago, I received a call from a local realtor with an odd, but not unusual, request: He needed a contractor who was or could become 203(k)-approved. The agent had already started the loan process with a competitor when he realized he did not have a qualified contractor to complete the needed repairs. After several weeks of searching through his and the lender’s sources, a fellow realtor suggested that the agent call me. I gave the agent the names and phone numbers of three contractors that I have used on 203(k) projects over the past year. One of the contractors was awarded the job and is currently handling the repairs.

As a 203(k) lender, I am not required to have a list of potential contractors for use by my customers. However, to be successful with this program you must put yourself in a position to assist your customers with both credit and renovation issues.

What can be learned from this story?

1. The most successful 203(k) lenders have taken the time to put all the pieces of the puzzle together for their customers. A good 203(k) lender will understand the role of contractors, FHA consultants, local zoning and permitting requirements along with a basic idea of renovation cost for their market. Don’t be just an app taker; work the program.

2. Contractors and renovation vendors (e.g., mold and lead-based paint testers, structural engineers, termite inspectors, etc.) should contact local FHA 203(k) lenders and ask to be approved as a contractor or placed on a vendor list for use by potential customers. There is business here for those who search it out.

3. Realtors need to better understand the basics of the 203(k). Go to the loan application with your buyer so you can educate yourself on the 203(k) process. I also suggest that agents accompany their buyers on the walk-through with the FHA 203(k) Consultant. Learn from your consultant; it is my experience that the best consultants really enjoy educating others about home repair (consultants are another excellent source for contractor and renovation vendor referrals).

Foreclosures, short sales, and homes with deferred maintenance continue to saturate the market. Use the “k” to move these properties and get your piece of the pie.

FHA 203k and Energy Efficient Mortgages

Use the Energy Efficient Mortgage standards with your FHA 203k loans to finance energy improvements to both a new home purchase or on your refinance.