Many lenders have noticed a growing number of cash buyers for residential real estate. These sales often involve distressed properties that require a significant amount of repair to be considered for conventional financing. Cash buyers typically purchase a property at below-market value and then put additional money into addressing the property’s required repairs before selling for profit.
For most homebuyers, paying cash for a property then spending additional money on improvements simply isn’t an option. That said, lenders should be aware that certain financing alternatives are available to their borrowers who are interested in getting a loan, then having additional funds to make repairs. Namely, originators should be familiar with the 203(k) renovation loan from FHA.
Having a thorough understanding of the FHA’s 203(k) product is especially important in light of the many borrowers who don’t seem to be aware of how they can benefit from this type of loan. That’s why the process of identifying, evaluating, and buying a property with a renovation loan requires the right kind of assistance from the right kind of mortgage lending professional.
Lenders can begin by getting familiar with the two common types of 203(k) loans from FHA:
The Standard 203(k): This option allows borrowers to purchase or refinance and include the cost to renovate in the same loan. It also allows for a range of improvements, including structural changes to the building’s footprint. Consumers can borrow against their homes for as much as 110% of the homes’ future value. The required improvements should be completed within 180 days of funding.
The Streamlined 203(k): Flexible credit qualifying permits an additional $35K of financed improvements into the mortgage without staged draws. Borrowers can tap into cash to pay for property improvements and they can complete minor nonstructural repairs.
Mortgage professionals should be ready to field common borrower questions pertaining to qualification.
According to the FHA’s general guidelines, 203(k) borrowers should:
Pass the FHA’s standard underwriting guidelines.
Have a downpayment of 3.5%— e.g., they should have a 96.5% LTV
Have a minimum FICO of 640.
Ensure that the loan amount and LTV are based on the improved appraisal value.
Ensure that all repairs are completed after closing.The Streamlined 203(k) allows for a maximum of $35K in repairs, while the Standard 203(k) can allow for even greater funds, depending on a variety of factors.
The process of improving a home begins long before contractors begin working. By educating your borrowers, you can help them understand and acquire exactly the loan they’ve been looking for, while also earning their trust and growing your business.
Author Bill Ashmore, President, Impac Mortgage can be reached at firstname.lastname@example.org.
Impac Mortgage’s Correspondent Lending division provides lending institutions a full suite of services including the 203(k) Home Renovation Loan. We purchase FHA, VA, USDA, Freddie Mac® and Fannie Mae® loans on a flow and mini-bulk basis and are a direct deliverer to Ginnie Mae, Fannie Mae and Freddie Mac. For more information, please visit: http://www.impaccompanies.com/cusp.
A portion of this article originally appeared in the February issue of The Scotsman Guide.