FHA 203(k) Program Offers Way to Finance Repairs for Foreclosures

Purchasing foreclosures also means discounts, but with the markdown is the price of repairs. According to RealtyTrac, foreclosures or REOs sold at an average discount of 27 percent compared to non-distressed properties in the first quarter of 2012. Through an FHA 203(k) loan, potential buyers who want to purchase a discounted foreclosure but don’t have cash for the repairs may find a way to receive financing. According to HUD, the 203(k) program is the department’s main program for rehabilitating and repairing single family properties, and it’s viewed as an important tool to revitalize neighborhoods. In order to be eligible, the property must be purchased as a primary residence or it can be for a HUD approved nonprofit. Also, the property must be a one-to four-family residence that has been completed for at least one year. Dan Green, loan officer with Waterstone Mortgage and author of themortgagereports.com, explained that FHA 203(k) program can be used on any 1-4 unit residential property, and is not limited to just HUD properties or foreclosures. The maximum amount that can be taken out for the property is based on the value or the purchase price of the property before rehabilitation (whichever is less), plus the estimated cost of rehabilitation or 110 percent of the property after improvements, according to HUD. A down payment is required, and the minimal amount for a down payment is 3.5 percent of the accepted bid price plus the cost of financing additional repairs. Since there is more “file” to underwrite for an FHA 203(k) loan, Green said the approval process takes longer than a standard FHA mortgage. “FHA 203k approvals take more time, but are no more difficult than any other mortgage type,” said Green. “Borrowers should expect to provide the documentation required, and should respond to loan officer requests in a timely manner.” By: Esther Cho