The 203K program has been around for a while, but a few years ago the "Streamline" version of the program was released by HUD. The 203K is a Rehab loan program. The more popular "Streamline K" program is good for up to $35,000 in improvements. When this is combined with the fact that you can buy a home with an FHA loan with only 3% down (will be 3.5% in 2009) and then get an additional $35,000 to improve the home, the program really stands out as something to be considered.
This program is not just for purchasing a home. It can also be used as part of a refinance to make improvements to a home. Borrowers who want to improve their home instead of move. To see a video I put together on this program, click here.
The Best Deals are on the Damaged Bank REO's
In Orange County, CA home buyers are finding that although it is a buyers market, there are a lot of buyers out there. A nice home in a good location will get multiple offers. Meanwhile, a Bank REO that was damaged by the previous owners, or even by squatters or thieves, can be a diamond in the rough. But first you need to have a little vision, and a Realtor and Loan Officer who know more than just the basic loan programs.
Typical Improvements Allowed on the Streamline 203K program
- Kitchen or bath remodels
- Patios, decks or terraces
- Safety, energy efficient and electrical upgrades
- Windows and doors, siding
- Appliances - Yes, that's correct. You can buy new appliances as part of this program.
- Minor remodels that don't require structural repairs
- Heating and air conditioning
Luxury items are not permitted, such as swimming pools, hot tubs, tennis courts (but wouldn't that be fun), saunas or alterations to support commercial use.
How Does the FHA 203K Streamline Program Work?
When the loan is funded, 50% of the rehab funds are disbursed immediately. Included with the initial disbursement is an instruction letter with details regarding the 2nd (final) disbursement. The final disbursement is issued only when all of the work is completed. If the work is $15,000 or more then a final inspection by an FHA appraiser is required. If the work is less than $15,000, then no final inspection is required. This would be perfect if appliances were the primary reason for using a 203K.
Is Qualifying Difficult?
No. The process for getting PreQualified for this program is the same as a normal FHA loan. Down payment is still only 3%, credit is flexible, and the initial approval can be, and in most cases is, Automated.
Once PreQualified, and then PreApproved, the next step is to go find a house. Home buyers will find there is not as much competition for a damaged home. Most people will shy away from these homes, leaving them for investors looking to make money by flipping the property.
Once a property is found, the borrower needs to determine improvements needed and schedules an inspection with a cost consultant. The cost consultant (or borrower in some situations) then completes the work write-up and prepares contractor bid packages to obtain cost estimates. The appraiser will use the work write-up to determine "as is" and "improved value."
The Loan Officer and/or Realtor will be able to guide the home buyer through this part of the transaction. It is helpful to work with a Loan Officer who works with a lender who is a Direct Endorsed FHA lender and can fund the loan "in-house" rather than broker it out. Control of the loan process is very important and can also save money for the buyer.
This program will be very popular in 2009. Foreclosed properties are not known for being in pristine condition, and the banks selling the properties typically are unwilling to fix repairs. The FHA 203K Streamline program will be an important tool for any home buyer to have when beginning to home buying process.
Authored by Tim Storm, CMPS, Sr. Loan Officer with Home Point Financial, a Direct Endorsed FHA Lender located in Orange County, CA. Direct: 949-829-1846.