Save money, no stigma: Rehabbing with a 203(k)
by Colin Murphy
02-08-2008

Photo by Scott Lokitz
Many kinds of rehabs can be done with a 203(k) loan.

With its historic neighborhoods and gorgeous brick, St. Louis is a treasure trove for prospective first time home buyers. But many potential consumers shy away from older dwellings in need of rehab or repair because the process seems too daunting. But if a home that needs repair has caught your eye or you wish to finance needed repairs to your current home, the Section 203(k) loan program by the U.S. Department of Housing and Urban Development (HUD) may be something to consider.

The Section 203(k) loan program is HUD’s primary program for the rehabilitation and repair of single family properties. Section 203(k) loans are provided through HUD-approved mortgage lenders nationwide and are insured by the Federal Housing Administration (FHA), which is part of HUD. “Section 203(k)” refers to the law, part of the National Housing Act, which allows FHA to make this mortgage insurance available. The loans are beneficial for low to moderate income individuals or families since the loan down payment can be as little as three percent.

“FHA from what I’ve seen may have somewhat of a stigma as for being for people with poor credit, first time home buyers or for low income customers,” said Ruth Battle, Senior Vice President for Paramount Mortgage in St. Louis. “That’s not the case.”

According to Battle, the program is ideal for urban areas like St. Louis in need of revitalization and for expanding homeownership opportunities. Locally, a lot of lenders still don’t participate in the program and presently FHA recommends only Paramount Mortgage and Wells Fargo in our area.

“FHA is wonderful because it allows you to get a good market rate,” explained Battle. “Another reason I think a 203(k) loan should be considered is because it’s a one time close. The third is the fees; the fees on this loan are very minimal compared to the other construction lending loans.”

How it Works

The 203(k) program is structured to last a maximum of six months and allows you to either purchase a home or refinance a home you already own and do some form of improvement. The minimum improvement threshold is $5000 and part of that must be some sort of a structural repair.

Potential homebuyers must figure out what improvements they wish to do, and build a team, including a real estate professional, a trustworthy lender, and a general contractor if desired. A 203(k)/FHA approved consultant is also recommended but not required. The consultant helps point homebuyers in the right direction in terms of what they should repair and waves them off of extravagant improvements which might be denied under FHA.

An itemized repair list is then formed (plumbing, painting, electric, etc.) and maintained throughout the entire project.

“There are standardized forms that 203(k) has that everybody uses so we’re all reading out of the same book,” said Battle. “With a project like this, that’s extremely important.”

The final step in the process is FHA ensuring the homeowner can afford the payment. They also must assess what the house is worth and what the value of the home will be after it has been improved. The value of the home after work is done must support the cost of repairs.

At this point, if the math doesn’t work, the 203(k) consultant can tweak the plan. Once approved and closed on, the consultant will inspect construction work and make sure it is being done in a timely fashion, and disperse funds accordingly.

“Safeguards for the consumer at this point are very important,” explained Battle. “We want to make sure that the work is done in a workman like fashion, with the materials that have been promised and on a timetable that’s acceptable to the customer.”

The 203(k) loan is funded with enough to pay for the repairs that are being done as well as, if the numbers work, additional costs. Up to six months worth of payments can be put in an escrow account.

“We appreciate you may have to pay rent or mortgage elsewhere why your house is being worked on,” Battle said.

You can e-mail Colin Murphy at colin_murphy@sbcglobal.net.

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