A Rehab Mortgage Insurance
203(K) REHAB MORTGAGE INSURANCE[1]
Summary:
Section 203(k) insurance enables homebuyers and homeowners to
finance both the purchase (or refinancing) of a house and the cost of its
rehabilitation through a single mortgage or to finance the rehabilitation of
their existing home.
The Section 203(k) program is FHA’s
primary program for the rehabilitation and
repair of single-family properties. As such, it is an important tool for
community and neighborhood revitalization, as well as to expand homeownership
opportunities.
Purpose:
Section 203(k) fills a unique and important need for homebuyers.
When buying a house that needs repair or modernization, homebuyers usually have
to follow a complicated and costly process. The interim acquisition and
improvement loans often have relatively high interest rates, short repayment
terms and a balloon payment. However, Section 203(k) offers a solution that
helps both borrowers and lenders, insuring a single, long term, fixed or
adjustable rate loan that covers both the acquisition and rehabilitation of a
property. Section 203(k) insured loans save borrowers time and money. They also
protect the lender by allowing them to have the loan insured even before the
condition and value of the property may offer adequate security.
For less extensive repairs/improvements, see Limited 203(k). For
housing rehabilitation activities that do not also require buying or
refinancing the property, borrowers may also consider HUD’s Title I Property
Improvement Loan program.
Type of Assistance:
Section 203(k) insures mortgages covering the purchase or
refinancing and rehabilitation of a home that is at least a year old. A portion
of the loan proceeds is used to pay the seller, or, if a refinance, to pay off
the existing mortgage, and the remaining funds are placed in an escrow account
and released as rehabilitation is completed. The cost of the rehabilitation
must be at least $5,000, but the total value of the property must still fall
within the FHA mortgage limit for the area. The value of the property is
determined by either
- the value of the property
before rehabilitation plus the cost of rehabilitation, or
- 110 % of the appraised value of
the property after rehabilitation, whichever is less.
Many of the rules and restrictions that make FHA’s basic
single-family mortgage insurance product (Section 203(b)) relatively convenient
for lower income borrowers apply here. But lenders may charge some additional
fees, such as a supplemental origination fee, fees to cover the preparation of
architectural documents and review of the rehabilitation plan, and a higher
appraisal fee.
[1] https://www.hud.gov/program_offices/housing/sfh/203k/203k–df
ELIGIBLE
ACTIVITIES:
The extent of the rehabilitation covered by Section 203(k)
insurance may range from relatively minor (though exceeding $5000 in cost) to
virtual reconstruction: a home that has been demolished or will be razed as
part of rehabilitation is eligible, for example, provided
that the existing foundation system remains in place.
Section 203(k) insured loans can finance the rehabilitation of the residential
portion of a property that also has non-residential uses; they can also cover
the conversion of a property of any size to a one-
to four- unit structure. The types of
improvements that borrowers may make using Section 203(k) financing include:
- structural alterations and
reconstruction
- modernization and improvements
to the home’s function
- elimination of health and
safety hazards
- changes that improve appearance
and eliminate obsolescence
- reconditioning or replacing
plumbing; installing a well and/or septic system
- adding or replacing roofing,
gutters, and downspouts
- adding or replacing floors
and/or floor treatments
- major landscape work and site
improvements
- enhancing accessibility for a
disabled person
- making energy conservation
improvements
HUD requires that properties financed under this program meet
certain basic energy efficiency and structural standards.
APPLICATION:
Applications must be submitted through an FHA approved lender.
VA Loans for Alteration and Repair/ Supplemental Loans
LOANS FOR
ALTERATIONS AND REPAIRS[1]
VA may guarantee a loan for alteration and repair:
- Of a residence already owned by
the Veteran and occupied as a home, or
- Made in conjunction with a
purchase loan on the property.
The alterations and repairs must be those ordinarily found on
similar property of comparable value in the community.
The cost of alterations and repairs to structures may be
included in a loan for:
- the purchase or
- regular “Cash-Out” refinance of
improved property to the extent that their value supports the loan amount.
ALTERATIONS/
REPAIRS WITH A VA SUPPLEMENTAL LOAN
A supplemental loan is a loan for the alteration, improvement,
or repair of a residential property. The residential property must secure an existing VA-guaranteed
loan, and be owned and occupied by the Veteran, or the Veteran will reoccupy
upon completion of major alterations, repairs, or improvements.
The alterations, improvements, or repairs must:
- Be for the purpose of
substantially protecting or improving the basic livability, or utility of
the property, and
- Be restricted primarily to the
maintenance, replacement, improvement or acquisition of real property,
including fixtures.
Installation of features such as barbecue pits, swimming pools,
etc., does not meet this requirement.
No more than 30 % of the loan proceeds may be used for the
maintenance, replacement, improvement, repair, or acquisition of non-fixtures
or quasi-fixtures such as refrigeration, cooking, washing, and heating
equipment. The equipment must be related to or supplement the principal
alteration for which the loan is proposed.
CHANGE IN RATE
The existing loan must be current with respect to taxes,
insurance, and amortized payments, and must not otherwise be in default unless
a primary purpose of the supplemental loan is to improve the ability of the
borrower to maintain the loan obligation.
The making of a supplemental loan can never result in any
increase in the rate of interest on the existing loan.
A supplemental loan to be written at a higher rate of interest
than that payable on the existing loan must be evidenced by a separate note
from the existing loan
PROCEDURES
Submit a statement describing the alterations, improvements, or
repairs made or to be made with the prior approval application (or loan closing
package, if closed automatically). In addition, report the amount outstanding
on the existing loan as of the date of closing of the supplemental loan in the
loan closing package.
If the cost of the repairs, alterations, or improvements exceeds
$3,500: an NOV and compliance inspections are required.
UNDER $3,500
REQUIRES A STATEMENT FROM AN APPRAISER
If the cost of the repairs, alterations, or improvements does
not exceed $3,500: an NOV (Notice of value) and compliance inspections are not
required. Instead, a statement of reasonable value may be submitted. The
statement must be completed and signed by a VA-designated appraiser. A
VA-designated appraiser is an individual nominated by the lender (who may be an
officer, trustee, or employee of the lender or its agent) who has been approved
by the local VA office. In lieu of VA compliance inspections, the lender must
submit a certification as follows:
“The undersigned
lender certifies to the Department of Veterans Affairs that the property as
repaired, altered, or improved has been inspected by a qualified individual
designated by the undersigned, and based on the inspection report, the
undersigned has determined that the repairs, alterations, or improvements
financed with the proceeds of the loan described in the attached VA Form
26-1820, appear to have been completed in substantial conformance with related
contracts.”
COLLATERAL/ PORTFOLIO LOANS
Hindsight often gives
us different perspectives and allows us to see things in the past more clearly.
Much is written in hindsight about the cause(s) of the financial crisis of
2007/2008. There are many theories that it’s cause was the extensive use by
lenders of subprime financing.
Subprime lending
carries many definitions. Investopedia defines subprime lending as the practice
of lending to borrowers with low credit ratings and higher interest rates due
to relatively high default rates. Subprime lending also was chalked full of
predatory features like teaser rates and prepayment penalties.
Subprime lending is
viewed as having contributed to the 2007–2008 financial crisis, due in part to
the phenomenon of securitization. [1]
But there also existed
a non-traditional lending practice that carried a significant impact on the
financial crisis that was not considered a subprime product. That was the
practice of lenders making available collateral loans to all risk ranges of
borrowers.
Collateral loans were
loans in which the traditional practice of determining a borrower’s ability to
repay (ATR) was deemed to not be necessary because properties (collateral) were
appreciating very rapidly in many areas of the country. From a risk management
perspective, lenders did not determine ATR because in the event of foreclosure
the appreciation of the collateral for the mortgage (the property) would
protect the lender from loss.
Collateral loans
allowed lenders to relax their strict lending policies and offer customer
friendly mortgages that in come cases were no-doc (no documentation) and
low-doc (very little documentation) thus allowing customers to get loans
without the burden of proof of ATR.
The financial crisis
caused housing prices to fall and, in many instances, borrowers simply walked
away from their homes because collateral loans, based on expected appreciation,
left borrowers owing more then the value of their homes.
Nevada experienced the
biggest drop during the recession, with a 60 percent decline in home prices.[2]
PORTFOLIO LOANS
A portfolio lender
uses its own money to grant loans and does not sell its loans to institutional
investors. The two largest investors in mortgages, Fannie Mae and Freddie Mac,
buy only loans that meet their strict underwriting standards because they want
to minimize risk for their investors. Borrowers who don’t meet Fannie and
Freddie guidelines may want to turn to a portfolio lender.
Portfolio lenders are
likely to be smaller, community banks with more flexible lending standards than
conventional banks. They invest in communities and relationships, so they can
make decisions based on more than the answers on a borrower’s application. They
can consider intangible factors, too, and may grant mortgages to people with
blemished credit with whom they’ve had long-standing relationships.
But portfolio lenders
do not offer all the loan programs that large commercial banks do. Some may not
offer the 30-year fixed-rate mortgage but can grant a 15-year fixed-rate
mortgage or an adjustable-rate mortgage that matches up well with the
investment strategy of the institution. Also, a portfolio lender will often
require that the borrower have his money and accounts with them.[3]
Portfolio lenders use
their portfolios for different types of lending such as commercial as well as
residential loans. They also may use it to comply with the Federal Community
Reinvestment Act (CRA) which since 1977 encourages lenders to meet low-income
neighborhood needs.
[1] https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp
[2] https://www.corelogic.com/downloadable-docs/corelogic-peak-totrough-final-030118.pdf
[3] https://www.bankrate.com/glossary/p/portfolio-lender/
The statement must specify the:
- work done or to be done,
- purchase price or cost of the
work and material, and
- purchase price or cost does not
exceed the reasonable value.
[1] https://www.benefits.va.gov/WARMS/docs/admin26/handbook/ChapterLendersHanbookChapter7.pdf
ELLER
FINANCING
Seller financing is
best thought of as the seller acting as a lender instead of a buyer seeking
financing through traditional sources such as a bank, credit union, mortgage
broker or mortgage banker. There are a number of circumstances that might
dictate this type of rare sale.
From the buyer’s side
- The
buyer may not be able to get regular financing from a lender because they
are unqualified
- The
buyer may want a lower cost option where the closing costs are less than a
bank
- There
may be a need for a quicker transaction to provide access to the property
in a shorter timeframe then the lender process
- The
property may not meet property standards required by lenders but the buyer
still wants the property
- The
property may be in a geographic area where traditional financing is not
readily or competitively available
From the seller’s side
- The
seller may not need the proceeds or cash right away in the home sale
- The
seller may not want to do the repairs required by a traditional lender (As
Is)
- The
seller may not want to remove an outbuilding such as a mobile home on the
site
- The
seller can get a higher rate of interest providing seller financing making
the note a good investment
- Like
the buyer, the seller may want a quick transaction
- Seller
financing may give the seller a competitive edge in selling the property
GENERAL CONSIDERATIONS
- Both
parties should have legal or real estate representation
- Financing
terms typically favor the seller
- Financing
is not typically long term (a couple of years) with a balloon feature that
require buyers to refinance and pay the seller off
- Buyers
must ensure that documentation provides credit for downpayment and built
up equity
- Buyers
must ensure themselves that the seller can legally provide seller
financing and that the property isn’t encumbered by a mortgage prohibiting
seller financing sale
- Seller
transactions typically require a downpayment just like a traditional
lender
These listed examples
are just a few of the many motivations of the buyer and the seller electing the
use of seller financing. This financing method typically accommodates a method
of sale and is not a preferred long-term financing option due to higher rates
and balloon options.[1]
Affordable Housing
Programs
USDA: AKA Rural
Development
The US Department of
Agriculture provides government assistance in rural areas throughout the US.
Its objective is helping improve the economy and quality of life in rural
America. Through their programs, it helps rural Americans in many ways:
- It
offers loans, grants and loan guarantees to help create jobs and support
economic development and essential services such as housing; health care; first
responder services and equipment; and water, electric and communications
infrastructure.
- It
promotes economic development by supporting loans to businesses through
banks, credit unions and community-managed lending pools. It offers
technical assistance and information to help agricultural producers and
cooperatives get started and improve the effectiveness of their
operations.
- It
provides technical assistance to help communities undertake community
empowerment programs and from a housing perspective it helps rural
residents buy or rent safe, affordable housing and make health and safety
repairs to their homes.[2]
Rural Development (RD)
programs give individuals the opportunity to buy, build, repair or own safe
affordable housing. Eligibility for these loans, loan guarantees and grants are
based on income and the average median income for each area.
Rural Development
loans are made directly through the USDA. They are also made by USDA approved
lenders through loan guarantee programs. (This
course will highlight these two programs which can vary by state.) [3]
Single Family (Direct
Housing Program) Loans: AKA Section 502 Loan Program
- Safe,
well built affordable homes for “very-Low and low-income rural Americans”
- For
families or individuals
- Purpose:
to buy, build, improve, repair or rehabilitate a rural home as a permanent
residence
- Population:
up to 35,000
- Loan
made directly to the borrower
- LTV
up to 100% of market value or cost
- Loan
terms of 33/38 years
- Applicant
may be eligible for a payment assistance subsidy on the loan
[1] https://www.investopedia.com/articles/mortgages-real-estate/10/should-you-use-seller-financing.asp
[2] https://www.rd.usda.gov/about-rd
- Be
without decent, safe, and sanitary housing
- Be
unable to obtain a loan from other resources on terms and conditions that
can reasonably be expected to meet
- Agree
to occupy the property as your primary residence
- Have
the legal capacity to incur a loan obligation
- Meet
citizenship or eligible noncitizen requirements
- Not
be suspended or debarred from participation in federal programs
Single-Family Housing
Guarantee Program for Approved Lenders
- To
assist low- to moderate-income applicants/household buy their homes by
guaranteeing loans made by private lenders
- For
Families or individuals
- For
the purchase of a new or existing home or refinance an existing Rural
Development guaranteed or direct loan
- Rural
area also defined with population limits up to 35,000
- The
loan is guaranteed to an approved lender and not a direct loan with Rural
Development
- Terms:
30-year fixed. The interest rate is negotiated between lender and
borrower. Loans up to 100% of market value plus the amount of the up-front
guarantee fee being financed.
Who may apply for the
Guarantee Program?
Guarantee Applicants must:
- Meet
income-eligibility.
- Agree
to personally occupy the dwelling as their primary residence.
- Be
a U.S. Citizen, U.S. non-citizen national, or Qualified Alien.
- Have
the legal capacity to incur the loan obligation.
- Have
not been suspended or debarred from participation in federal programs.
- Demonstrate
the willingness to meet credit obligations in a timely manner.
- Purchase
a property that meets all program criteria[1]
HUD Revitalization
Program[2]
Good Neighbor Next
Door
Law enforcement officers,
pre-Kindergarten through 12th grade teachers, firefighters and emergency
medical technicians can contribute to community revitalization while becoming
homeowners through HUD’s Good Neighbor Next Door Sales Program.
HUD offers a
substantial incentive in the form of a discount of 50% from the list price of
the home. In return you must commit to live in the property for 36 months as
your sole residence.
How the program works:
Eligible Single-Family
homes located in revitalization areas are
listed exclusively for sale through the Good Neighbor Next Door Sales program.
Properties are available for purchase through the program for seven days.
- Revitalization
Areas are HUD-designated geographic areas authorized by Congress under
provisions of the National Housing Act. Revitalization Areas are intended
to promote “the revitalization, through expanded homeownership
opportunities, of revitalization areas.”
The criteria for
designating an area as a Revitalization Area relate to:
- Household
Income,
- Homeownership
Rate, and
- FHA-insured
mortgage foreclosure activity.
HUD-owned
single-family properties located in a Revitalization Area are eligible for
discounted sale through special programs, including:
[1] https://www.rd.usda.gov/resources/publications/fact-sheets
[2] https://www.hud.gov/program_offices/housing/sfh/reo/abtrevt
