These Mortgages Allow Can Pay For Home Renovation

Mortgage programs can pay for home renovation

Saturday, September 10, 2011

By Polyana Da Costa, bankrate.com

Two little-known home renovation mortgage programs offer solutions for buyers and homeowners who want to renovate.

Fannie Mae and the Federal Housing Administration have home renovation mortgage programs that allow buyers to borrow based on what the house is expected to be worth after the home rehab is completed. Homeowners can also use both programs to refinance their existing mortgage, plus the renovation costs, into one loan.

FHA's 203(k) program and Fannie's HomeStyle Renovation Mortgage have been around for years.

"A couple years ago there wasn't as much demand for these loans," says Leesa Sandoval, a loan officer with PrimeLending in Dallas who specializes in renovation mortgages. "But now they are great to get some of this [housing] inventory sold and get these foreclosures out of the market."

The FHA insured 22,491 home renovation mortgages in the 2010 fiscal year -- more than six times the number it insured in 2007, according to the agency's latest report on 203(k) loans.

Dustan Shepherd, a loan officer and 203(k) specialist with BNC National Bank in Overland Park, Kan., says while demand for the rehab loans is up, many borrowers are not aware of the programs or think they are too complicated.

Unlike credit lines, these renovation loans require borrowers to show the money was spent on the house. In the standard FHA 203(k) program, the borrower hires a consultant to assess the construction plan and to perform an inspection before a "draw"-- when a portion of the money is disbursed to the contractor. Borrowers have up to six months and five draws to finish a project. The HomeStyle program does not require a consultant to monitor the work, only an initial and final inspection.

While rehab loans involve more work than traditional mortgages, they can help those who want to buy discounted homes that need repair.

Mr. Shepherd says he recently helped a couple that bought a foreclosed house in Kansas City, Mo., for $26,000 and borrowed $136,000 to renovate the property. An appraisal estimated the home would be worth about $135,000 after the work is completed. The couple was able to take out an FHA 203(k) mortgage totaling $144,000, which covered the price of the house, renovations, and loan costs, minus a down payment. "It's a great way to buy low and renovate to the buyer's specific style and taste," Ms. Sandoval said.

But how do you know which loan is better? It depends on the situation.

Those who don't have great credit should probably opt for an FHA 203(k). Most HomeStyle lenders require a credit score above 680. To get the best rate on a HomeStyle mortgage, borrowers need to have a minimum 740 credit score, Ms. Sandoval says.

For borrowers with credit scores lower than 740, it's best to compare estimates, Ms. Sandoval says. FHA does not set a minimum score requirement for 203(k) loans, but many lenders require a score of 640 or greater. There are a few exceptions and some lenders accept scores as low as 600, Mr. Shepherd says.

Under the FHA's 203(k) program, borrowers can get a mortgage with a down payment as little as 3.5 percent. HomeStyle requires a minimum 5 percent down payment.

The FHA 203(k) program is available only for owner-occupants. The HomeStyle program allows investors.

The 203(k) rehab mortgage must comply with FHA loan limits. The limit varies by county but is $271,050 in most places. In high-cost areas, the limit is as a high as $625,500 starting Oct. 1. The upper limit in highest-cost areas is $729,750 through September.

With a 203(k) loan, borrowers can get up to 110 percent of the home's appraised value, compared to 95 percent with a HomeStyle loan. Both appraisals are based on what the house is expected to be worth after repairs.

For more information call Dustan Shepherd at: 1-800-689-6001 or email him a question at: info@203kkc.com

Also published at:
Pittsburgh Post Gazette
Detroit News
Fidelity.com
Fox Business News

Keeping Your Homeowners Insurance Up To Date

Home insurance, also commonly called hazard insurance or homeowners insurance (often abbreviated in the real estate industry as HOI), is the type of property insurance that covers private homes. All lenders require an HOI policy that meets or exceeds the loan amount at the time of closing. Although most homeowners have a current policy (83% per a recent study), many have not been reviewed annually, thus the cost replacement value has not kept up with the increase in the cost to rebuild the home. As devastating storms have recently torn through the southeastern United States, many homeowners are finding that their current policy does not cover all of their rebuilding costs or that many policies did not cover certain storm damage from natural disasters like flooding or tornados.

Your homework for the coming week is to pull out your HOI policy and call your agent for a review.

If you are interested in using a FHA 203k mortgage in a storm-ravaged area feel free to call me at 1-800-689-6001 or e-mail me at info@203kkc.com to discuss your particular situation.

FHA 203k Loans Volume Continue To Increase In 2010

HUD recently released its fiscal year-end FHA loan endorsement figures for 2010 (year ending September 31,2010). As you can see by the chart below the number of FHA 203k loans insured in 2010 was in excess of 22,000. Over the past five years the 203k loan has seen an increase in production from 2,924 loans in 2006 to 22,491 closed 203k loans in 2010.

The FHA 203k is a valuable tool for financing homes in today’s residential real estate market. Take the time to learn the basics and find a 203k lender who can assist you in identifying a team of 203k professionals that can help you realize your dream of homeownership.



email me with your 203k questions at: dshepherd@bncnationalbank.com or call at: 1-800-689-6001

FHA Loans Do Not Have A Prepayment Penalty

Just a quick reminder that FHA loans do not have a prepayment penalty. You can payoff the loan early or make periodic payments toward principal reduction without any a negative recourse.

The annual mortgage insurance (paid monthly) is in place for a minimum of 60 monthly payments and then can be removed once the loan-to-value reaches 78%.

Effective with mortgages endorsed for insurance on or after December 8, 2004, the refund schedule for those borrowers who refinance to another FHA-insured mortgage is modified to a three-year time period. A refund for loans not refinancing to another FHA - insured mortgage is eliminated.

Mortgagee Letter 2005-03

FHA Annual Mortgage Insurance Premium To Rise Quarter Of A Point

HUD this afternoon released the attached Mortgagee Letter 11-10 notifying lenders that with case numbers assigned on and after April 18, 2011 the annual premium will increase 25 basis points. The one-time upfront fee will stay at 1%. With loans in excess of 95% LTV the annual premium will move from 90 basis points to 115 basis points.

How Is A 203k Renovation Loan Different?

Most mortgage financing plans provide only permanent financing. That is, the lender will not usually close the loan and release the mortgage proceeds unless the condition and value of the property provide adequate loan security. When rehabilitation is involved, this means that a lender typically requires the home improvements to be finished before a long-term mortgage is made.

When a homebuyer wants to purchase a house in need of repair or modernization, the homebuyer usually has to obtain financing first to purchase the dwelling; additional financing to do the rehabilitation construction; and a permanent mortgage when the work is completed to pay off the interim loans with a permanent mortgage. Often the interim financing (the acquisition and construction loans) involves relatively high interest rates and short amortization periods. The Section 203k program was designed to address this situation. The borrower can get just one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work.

How the Program Can Be Used

This program can be used to accomplish rehabilitation and/or improvement of an existing one-to-four unit dwelling in one of three ways:

To purchase a dwelling and the land on which the dwelling is located and rehabilitate it.

To purchase a dwelling on another site, move it onto a new foundation on the mortgaged property and rehabilitate it.

To refinance existing liens secured against the subject property and rehabilitate such a dwelling.

How long does it take to process and close a 203k loan? After the loan application is taken the borrower and BNC will work together to complete a renovation loan package for the home. A home inspection of the property (we require the use of a 203k consultant for all 203k loans including streamlines), gathering bids from various vendors, developing the draw structure and agreeing upon the length of time to complete construction are all issues that have to be accomplished during this time. The renovation package can take one week to two months to complete depending upon your renovation needs. The total time to process and close a 203k will vary depending upon the time needed to process your credit and the time required to complete the renovation package. 203k loans with a renovation loan package that takes less than four weeks to complete should be in a position to close within 60 days from application (remember all renovation takes place after closing).

First Time Home Buyer Tax Credit Still Available For Some Veterans

In the fall of this year, all eyes were on our industry and the last push to close loans under the First-Time Homebuyer Tax Credit (extension deadline: September 30, 2010). Like many of you, I took a deep breath after my last closing and moved forward.

However, I let the provision for veterans and other federal employees fall by the wayside, and only last night while searching the Internet for mortgage data did I have my moment of clarity and realize that I had dropped the ball in marketing to my veteran clients. When Congress took action in November 2009 to extend the date for the First-Time Homebuyer Credit to April 2010, they also added additional language for our country's military veterans and other federal employees. The guideline reads as follows:

Members of the military and certain other federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and qualify for the credit. Thus, an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2011. If a binding contract is entered into by that date, the taxpayer has until June 30, 2011, to close on the purchase. Members of the uniformed services, members of the Foreign Service and employees of the intelligence community are eligible for this special rule. It applies to any individual (and, if married, the individual's spouse) who serves on qualified official extended duty service outside of the United States for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010.

More First-Time Homebuyer Tax Credit information can be obtained from the IRS website. Remember this is a tax credit and can be used on any loan program that best represents the veteran's needs, including VA, FHA (including the 203k), USDA and conventional.

Originating More Energy Efficient Mortgages In 2011

Under the FHA Energy Efficient Mortgage (EEM) Program, a borrower can finance into the mortgage 100 percent of the cost of eligible energy-efficient improvements, subject to certain dollar limitations. To be eligible for inclusion into the mortgage, the energy-efficient improvements must be cost-effective — i.e., the total cost of the improvements (including maintenance costs) must be less than the total present value of the energy saved over the useful life of the improvements. The cost of any improvement to the property that will increase the property's energy efficiency and that is determined to be cost-effective is eligible for financing into the mortgage.

The maximum amount of the portion of the EEM for energy is the lesser of 5% of:

• the value of the property, or
• 115% of the median area price of a single-family dwelling, or
• 150% of the conforming Freddie Mac limit (formula changed June 10, 2009-Mortgagee Letter 2009-8)

The FHA maximum loan limit for the area may be exceeded by the cost of the energy-efficient improvements. However, the entire mortgage cannot exceed 110 percent of the value of the property. The cost of the energy improvements and the estimate of the energy savings must be determined via a physical inspection of the property by a home energy rating system (HERS) or energy consultant. For a 203(k) loan, the entire cost of the HERS or energy consultant can be included in the mortgage.

Insulation and infiltration with adequate R-values or infiltration barriers in the form of:

• Insulation in ceilings, roofs, or attic floors that are over conditioned spaces, exterior walls, under floors that cover unheated areas, around slabs, around heating and cooling ducts and pipes in areas that are not conditioned, around the sill area and hot water heaters.
• Caulking and weather-stripping around window and door areas and at the sill areas.
• Special fireplace devices or features, such as combustion-air and flue dampers, and a fire door.
• Sealing of the sole plate and penetrations of the exterior shell.
• Dampers for exhaust fans.

Windows

• Double or triple-paned
• Storm windows
• Storm or insulated doors

Heating and cooling — new efficient systems may include:

• A high-efficiency oil or gas furnace with an Annual Fuel Utilization Efficiency (AFUE) rating of 80% or higher
• A high-efficiency heat pump with a Seasonal Energy Efficiency Ratio (SEER) measure of 9.0 or greater
• A Heating Seasonal Performer Factor (HSPF) of 7.0 or greater
• A central air conditioner with a SEER rating of 9.0 or greater

Heating and cooling system modifications may include:

• A flame retention oil burner
• Vent dampers for oil and gas furnaces
• Pilotless ignition for gas furnaces
• A secondary condensing heat exchanger for gas and oil furnaces

An EEM can be used with both the Streamline and a Standard 203(k) loan. One interesting combination is to use the Streamline (k) with an EEM. If your repairs will exceed the $35,000 limitation, the energy-efficient improvements can be pulled out of the 203(k) calculation (use your energy audit to identify the energy improvements). Once the 203(k) repair escrow is calculated, the energy improvements can be added back onto the loan, exceeding the $35,000 threshold if needed.

In 2011, we must be more diligent than ever about exploring different products and means by which to get deals closed. An EEM with a 203(k) or a FHA 203(b) mortgage should be in everyone's financing playbook.

Are FHA Loans Assumable?

If asked, how many real estate professionals could tell you that FHA 203(b) loans can be assumed by an owner-occupied creditworthy buyer? I bet that if a survey was taken today within the real estate community, you would be surprised to learn how many have no idea about this assumability feature. Over the past few months, our company has closed hundreds of FHA loans at 4% or better. As we stand today, those buyers have a selling niche that has not been seen in years: the assumable mortgage at a rate lower than the current market rate.


Did you know that at one time all FHA loans were non-qualifying assumptions? Pay the difference between the loan balance and the purchase price, and you were the proud owner of a new home. In the winter of 1989, FHA changed the ruling to allow only creditworthy assumptions for all loans closed after December 13 of that year.

I started in this business in the spring of 1985. Within weeks mortgage rates dropped below double digits, rose back above 10% in April/May, then returned to single digits in June, never looking back. Twenty-five years to catch what may be a market bottom in rates, and if the bottom is near, the current rate on an FHA loan becomes attractive as a future sales enhancement. It is not the sole reason to choose an FHA loan over another product, but now is the time to add it to your book of knowledge or in some cases dust off an old page that will set you apart from your peers.

When is an FHA Consultant's Feasiblity Study appropriate?

This week I worked a couple of loans for which an FHA Consultant's Feasibility Study was appropriate. I found myself wondering why I wasn't promoting the use of an FHA Feasibility Study more often.

We normally think of an FHA Consultant handling a full work write-up only when a home is under contract and a loan application has been accepted by a lender. However, a feasibility study can be conducted as a preliminary step to the full write-up.

The study is usually a two- to three-page summary of the mandatory repairs and an estimated cost needed to bring the home into FHA compliance. Reports cost between $150 and $300, depending on location and the type of structure being purchased or refinanced. (For example, a study on a 1,300 sq. ft. ranch-style home in Kansas City costs $150, while a study on a three-story, 3,500 sq. ft., brownstone in Brooklyn costs $250-$300). The consultant will usually allow the cost of the feasibility study to be credited to the cost of the full work write-up if the project continues.

When might you use a feasibility study?

A study is helpful if you are planning to refinance your home and are not sure whether including renovation items would be cost-effective or how repairs might affect your home's value. Every week I speak to homeowners who contact me for a standard FHA refi, but after a short discussion on the benefits of the (k), many decide that it's time to catch up on their home's deferred maintenance. A feasibility study is a great way for current homeowners to identify both mandatory and wish-list items for inclusion in their new loan. The study is also a good opportunity to speak with the consultant if your renovation plans include a room addition or other structural changes to your property.

A study is helpful if you are looking at a distressed property and want to identify the mandatory FHA repair items, as my North Carolina buyer is doing presently. In conjunction with putting a contract on a property, the buyer asked a local contractor and friend to walk through the home with him. The contractor identified numerous foundation and grading issues that needed to be addressed. The cost of those repairs prompted the borrower to rethink his purchase. We ordered a feasibility study on Friday so the borrower can identify the mandatory items and cost before he proceeds with this transaction. In this situation, the feasibility study is a cost-effective way to assist the borrower in making timely decisions concerning his purchase.

A study is a great sales tool for sellers to use in moving their property. Today's market is flooded with foreclosures, short sales, and homes with deferred maintenance issues, so it only makes sense to identify the mandatory items and use that information in a positive manner to sell your home.

A study is a great tool to use with a Streamline 203(k). Since I conduct business nationwide, I use an FHA Consultant on the majority of my 203(k) loans. A consultant's involvement is waived on one- or two-item loans (such as a roof, siding, a deck). But when I identify multiple repairs that can be made at a relatively low cost, I favor a feasibility study instead of a complete work write-up, in order to keep the consultant's cost in line with the repairs. Such was the case with my second situation, here in Overland Park: The foundation needed epoxy, the bathroom finished, the chimney tuck pointed, the electrical box needed review, GFIs in kitchen, holes in drywall — total repairs under $5,000.00. In this instance, the consultant need spend no more than an hour on site for a feasibility study, as opposed to two hours for a full write-up.

Information is king when you are working on a 203(k), and a feasibility study is a cost-effective way to gather essential information for your project.

FHA to provide free FHA 203k Webinar

October 19, 2010 – FHA 203(k) Webinar. This FREE Webinar includes an overview on how to combine a 203k, rehabilitation mortgage with a purchase or refinance transaction in order to be eligible for FHA mortgage insurance. This training will benefit lenders and real estate agents alike. The 203k program helps maximize a property's potential in this current housing market. Registration required, no fee. ALL TIMES ARE MDT. More info at: http://www.hud.gov/emarc/index.cfm?fuseaction=emar.registerEvent&eventId=653&update=N

Housing Charts

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.