By Brian Short, CMC, CRMS, GMA
It was announced at the end of last week that the National Association of Realtors was asking the Department of Housing and Urban Development (HUD) to re-open the FHA 203(K) loan program to investors as a part of the formula for helping reverse the continued downward spiral of the US housing market.
The FHA 203(K) loan is a government insured rehabilitation loan I have used to help home owners, either buy and rehab a home they plan to live in or to rehab the home they current live in. Either way, it works much like a construction loan with up to 5 draws for major projects to improve the condition of a distressed or out-dated property.
The borrower would be required to qualify for the final loan amount including the costs of the improvements and the money is only released after the work is completed and inspected to meet whatever codes or requirements necessary. The borrower is required to front the money for the repairs or use a contractor who will agree to be paid in stages as work progresses.
Improvements can be made from a long list of “qualified improvements” including updating kitchens, bathrooms, HVAC, electrical or plumbing systems, roof, windows, flooring, siding and even adding square footage by adding a master bedroom or bathroom.
One of the beauties of this loan is that the current mortgage must be rolled into the final loan so the borrower is left with only one final “all-inclusive” mortgage at a great FHA fixed rate.
However, in the late 90’s there were investors who were involved with some fraudulent deals with builders, appraisers and title companies who abused this program and HUD cut off all non-owner-occupants from using the FHA 203(K) loan. This decision shut down a lot of investor rehab activity until the sub-prime market began to pick it back up about 5-6 years ago. Two years ago, most of the non-owner-occupant rehab activity came to a crashing halt, once again, as the sub-prime programs evaporated and now, some neighborhoods are riddled with empty homes which have been vacant for several months and are in need of repair or normal improvements to ever get them sold.
Over the past 2 years appraisal standards have increased, property values have decreased and vacancy rates have increased. All of this leads to the need of investors to be enticed back into the market with favorable loan programs to reward their willingness to take on part of the risk of getting the housing market back out of the ditch.
NAR has called for a three year window for investors to be allowed back into the FHA 203(K) loan programs. I would echo their call but not put a 2 or 3 year limit in place at this point. Let’s take this one year at a time and call for Congress to immediately allow the non-owner occupant to qualify for the FHA 203(K) loan without further penalty and renew this provision again for another year at the end of 2009, 2010 and 2011 if necessary until we see normal numbers come back for the housing market. This plan is much better than a government bail-out plan and rewards those who are willing to take on risk with the rewards of profit to be made on investor houses they have repaired and updated to get off the market.