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

HUD Secretary Wants to Break Through Refinancing Barriers

Solvency issues re-emerged for the Federal Housing Administration (FHA) in a hearing convened Tuesday by the Senate Banking Committee, with HUD Secretary Shaun Donovan calling for lower loan-to-value thresholds and more servicer competition to expand refinance opportunities.

The hearing follows a bill by Sens. Barbara Boxer (D-California) and Robert Menendez (D-New Jersey) to roll back refinancing barriers for homeowners with GSE-held mortgages and featured the legislation prominently as lawmakers discussed solutions to the housing crisis.

Donovan praised the bill and identified three barriers to refinance opportunities for a broader swath of homeowners, including lower fees, streamlined underwriting practices, and manual appraisals for borrowers even in communities with few recent home sales.

The hearing quickly turned to servicer competition, which the HUD official said is lacking in part because of strict underwriting guidelines under Fannie Mae and Freddie Mac, inflating home prices and keeping refinance opportunities out of reach for many homeowners.

“Servicers who don’t service that loan are being discouraged from competing to refinance those loans,” he told lawmakers, citing a “number of changes” that legislators and regulators could make to remove barriers to homeowners.

He faulted existing loan representations and warranties for discouraging servicers from allowing borrowers to refinance at historically low interest rates.

“Frankly, we think it doesn’t make a lot of common sense that a homeowner who actually has more equity in their home is a lower-risk borrower… [than] homeowners who may be underwater on their homes,” he said. “It’s a question of fairness to make sure refinancing is available across the board.”

Sen. Richard Shelby (R-Alabama), a frequent critic of the FHA’s failure to stay above its 2 percent capital ratio buffer, reiterated concerns about the overcommitted housing agency in his opening remarks and later in questions during the hearing.

“Do you share my overall concern about the solvency of FHA?” he asked Donovan.

The HUD official answered by highlighting recent “substantial premium increases,” as well as a new rule on lender indemnification that he billed as a measure to protect the FHA’s cash-strapped Mutual Mortgage Insurance Fund.

“I do think we’re taking series of a number of broad steps to protect the fund,” he said.

The FHA remains a political hotspot for the housing industry, with a recent paper by Joseph Gyourko, a professor at the University of Pennsylvania, claiming last fall that it would need anywhere from $50 billion to $100 billion in Treasury draws, if trends persist.

By: Ryan Schuette