Your Mortgage : Revamped Loan Is Boon for Fixer-Uppers

Attention first-time home buyers and small-scale real estate investors: The most cost-effective--but least-known--federal mortgage program in the country has just been made even more attractive.

With a series of user-friendly rule changes, the Clinton Administration has pushed “203k” mortgage insurance onto center stage for anyone interested in affordable housing. Picture a program that gives:

--First-time purchasers the ability to acquire a house with zero down payment. You read that right: Zero. Zip. No equity money down.

--Non-first-time home buyers the ability to finance a dwelling with a mortgage that’s bigger than the current appraised value of the property. For example, you might have an “as-is” appraised value of $100,000 and walk away with a mortgage of $120,000.

--Investors the right to stack the full costs of renovating a fixer-upper property on top of the regular acquisition costs of the house--all for a 15% down payment that the investor can recoup with substantial profits in a matter of months.

Sound too good to be true? Not if you get up to speed with the Federal Housing Administration’s new and improved 203k program. Although on the books for years as the federal government’s primary financing vehicle for home renovations, 203k never produced many loans because lenders considered it an administrative nightmare. Barely a handful of mortgage companies nationwide ever bothered to offer it to consumers.

That is, until the Clinton Administration’s team at the Department of Housing and Urban Development (HUD) decided to rescue it, streamline it and turn it into a high-volume housing producer. With the administrative revisions inaugurated last week, HUD expects a network of hundreds of lenders nationwide to actively promote 203k--almost certainly including mortgage firms in Southern California.

How does 203k work? The basic premise of the program is that one of the best sources of affordable housing for moderate-income purchasers is fixer-uppers: Homes that need work and are priced or valued below their potential as a result. Put on a new roof, install a new heating system, modernize the kitchen and apply a coat of paint and the “handyman special” that everybody has passed by turns into a hot property.

The problem for fixer-upper purchasers--whether owner-occupants or investors--has always come in financing the renovations. Lenders typically have required buyers to come up with large down payments and to finance the rehab expenses separately from the “as-is” acquisition cost of the house. Only after all the repair work was completed might lenders be willing to provide a permanent mortgage on the renovated house.

Enter 203k. It allows borrowers to roll the as-is price of the property and the cost of the future renovations into one loan upfront. Even better, it extends highly favorable FHA down payment terms to the entire package. Although frequently that can mean a down payment of just 5%, the 203k program takes the low down payment concept a step further.

For what the government defines as “first-time buyers,” the required down payment can go to zero. First-timer for 203k, by the way, doesn’t necessarily mean you’ve never owned a house before. Rather you simply cannot have owned a home during the three years immediately preceding your 203k loan application. And if you’ve been divorced or separated for less than three years, don’t worry: You qualify as a first-timer as long as you no longer have an ownership interest in a home.

Consider this example of a zero-down deal provided by Ann L. Johnson of Tidewater First Financial Group of Springfield, Va., an active 203k lender. Say a small-scale investor or renovator locates a rundown townhouse needing $20,000 worth of repairs. The as-is, unrestored price of the place is $70,000. Total acquisition costs are projected at $90,000. The investor puts down 15% ($13,500). If the investor were going to retain the property for rental, a $76,500 loan ($90,000 less $13,500) would be the maximum mortgage allowed under the program.

However, if the investor planned to sell the renovated house to a first-time buyer, the loan ceiling could be considerably higher. Let’s say an FHA-approved appraiser estimates that after the renovations, the home would have a resale value of $125,000. Using what FHA calls the “escrow commitment procedure,” the investor could then qualify for a maximum loan of $119,250.

After completion of the renovations, the investor would allow a first-time buyer to take over (assume) the $119,250 loan for no cash down payment. The investor could either waive the $5,750 down payment altogether or take back a second mortgage note. The buyer, of course, would have to qualify financially to handle payments on that size mortgage debt.

At loan closing, from the $125,000 sale price, the investor would get the $13,500 he or she originally put down, plus a “profit” of $29,250 (the difference between the $119,250 ultimate loan amount and the $90,000 acquisition and renovation costs).

Sound intriguing? To get information on the 203k program, plus the names of participating lenders in your area, contact HUD at (202) 708-2720. Or write for the 203k brochure from HUD-203k, 451 7th St. S.W., Washington D.C. 20410-3000.