Your Mortgage : ‘203k’ Loan Pays More Than Home Value


The best-kept secret in American mortgage finance carries a code name that could mean big bucks to thousands of home buyers and refinancers in the coming months. You could be one of them.

The code is “203k.” The secret is this: Working through a network of about 500 local lenders and large national investors like Fannie Mae, the federal government is gearing up to push a financing concept that offers borrowers more money than the appraised value of their homes.

You read that right. If you qualify for a 203k mortgage, you get more money than your house is worth at the time of your application. Better yet, you get the loan with a tiny downpayment--often just 3% to 5%.

How can that be? Consider the case of Terry Hilger, a 38-year-old father of three who bought a three-bedroom contemporary subdivision home earlier this summer in Mt. Pleasant, S.C., near Charleston. The house first caught Hilger’s eye last April when it went on the market. It needed renovation and was listed as a fixer-upper at $78,500--considerably below the neighborhood’s prevailing price range in the $90s and low $100s.


To buy the house and make it habitable, though, Hilger confronted a commonplace, major hurdle: Virtually all conventional lenders in the United States are required by their investors to base maximum loan amounts on the current appraised value of the mortgage applicant’s real estate.

Assuming Hilger’s house appraised at $78,500 in “as-is” condition, he could expect to get a maximum loan of 80% to 90% of that amount--or anywhere from $62,800 to $70,650. But that wouldn’t help with the costs of the necessary renovation, which Hilger estimated to be about $16,000. He didn’t have cash like that on hand or even enough downpayment money for a conventional loan for that matter. Nor did he want to take out a separate note for the fix-up costs because such loans tend to be short-term and carry double-digit interest rates.

Enter the best-kept mortgage secret:

Hilger contacted a lender who is part of the new 203k network being set up nationwide. Here’s the deal he and his family walked away with: A $94,000 mortgage for 30 years. That amount covered both the as-is acquisition price of the home and the anticipated fix-up costs. About $16,600 of the loan amount was put in a special escrow account at closing, to be disbursed periodically over the ensuing months to pay renovation contractors and materials expenses associated with the fix-up.


Hilger’s rehab program--spelled out in detail to the lender and a construction consultant at the loan application stage--involved new exterior siding for the house, six new windows, a new energy-efficient heating unit, electrical upgrade, new doors, termite treatment, plumbing repairs, floor finishings and a long list of miscellaneous improvements.

Total cash out of Hilger’s pocket came to just over $5,000, he said, including downpayment, closing costs and fees. An additional expense--not out-of-pocket but spread over future years--was a higher interest rate than that prevailing in the conventional market. His loan has an 8 1/2% fixed rate, compared with the 7 1/8% average rate in the market when he closed.

“We decided that was a very reasonable extra charge to pay,” said Hilger in a telephone interview, “given the fact that we were getting a loan that covered everything and required such a small downpayment.”

Estimated resale value of Hilger’s new home after all renovations are complete: $115,000 to $120,000--well beyond the underlying $94,000 mortgage. Hilger’s loan is an “FHA 203k.” Though insured by the Federal Housing Administration (FHA), the mortgage money actually comes from private lenders like Fannie Mae. During the past year, FHA has begun pushing a streamlined version of the 203k program to mortgage bankers, brokers and the remodeling industry. Officials at the Department of Housing and Urban Development (HUD) have kept the program low-profile thus far, while they set up networks of lenders and construction inspection consultants around the country.

But now they say 203k is almost ready to go big time.

“We think it’s an excellent product,” says Fannie Mae’s Robert Sahadi. “We think it has great potential as an affordable housing tool,” whether on renovations in central cities or in suburbs.

Here are some basic guidelines if you want to check out 203k for yourself. First, it’s primarily intended to renovate single-family, owner-occupied homes, but it is open to investors and to dwellings with up to four units. Condo and cooperative units aren’t eligible. Minimum estimated renovation costs to qualify are $5,000, so if you’re just doing $2,000-$3,000 in cosmetic improvements, don’t bother with 203k.

You can do energy-conservation “retrofits” by refinancing into a 203k loan. You can make your house accessible to the handicapped. You can make a wide variety of improvements and wrap them all into a single mortgage package covering the entire house. You can even move a house from one location to another and rehab it with 203k.


A key limitation: Your loan amount can’t exceed FHA maximums for your market area, which range from $151,725 in higher-cost markets down into the $70,000 range in lower-cost areas.

To get details: Contact one of the 80-plus FHA field offices around the country (look under HUD in the federal government listings), or call FHA at (202) 708-2720 to get the names of participating lenders, or write for FHA’S 203K brochure, to HUD, 7th and D Streets, S.W., Washington D.C. 20410-3000.