FHA Loans - 203k Rehab Loan

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FHA 203K Rehab loans and the foreclosure market

How these loans are playing a big part to the housing rebound

Written by Jeff Onofrio December 9th, 2008 - National Future Mortgage Inc. - Branch Manager

The current climate of record foreclosure rates has brought a particular FHA loan category to the forefront of mortgage lending: the FHA 203K rehabilitation loans. While foreclosure properties generally come with a bargain-basement price tag, they also come with a fundamental need for rehabilitation. As a homeowner becomes less financially secure, deferred maintenance remains deferred, until rehab loans become the only way a buyer without huge financial resources and intent on owner-occupation can afford to purchase a foreclosure property. This loan can allow the buyer and loan orignator to make a sale work on a property that otherwise could not qualify for the favorable terms offered in federally-backed FHA Loans.

An FHA 203K loan allows the prospective buyer to purchase distressed foreclosure properties with only a 3% down payment. This 3% down payment represents 3% of the full purchase price plus the estimated repair costs which will be included in the rehab loan. The prospective buyer should find a property, execute a purchase and sale agreement that specifically states that the P&S is contingent on the purchaser successfully qualifying for an FHA 203K loan. The next step is to obtain details estimates for the repairs, generally from a licensed contractor, as well as an appraisal of property value based on the value after the repairs.

Once the buyer meets the lenders standards of credit worthiness and the property closing is executed, the funds for purchase are transferred to the seller or lien-holder and the remainder is placed in escrow to be used for the planned repairs. If the house cannot be occupied during the renovations, up to six months of payment, tax and interests (PTI) may be included into the loan, as well as up to 20% over repair estimate for potential cost overruns. THe only group this loan tends not to work for are those intent on purchasing a home strictly as an investment or to "flip" the property.

While it can be a lot of work, the FHA 203K can be the right loan for the first time home buyer to get the most house for their money, while helping communities by allowing owner occupants to rehabilitate foreclosure properties. By reducing the number of vacant properties, proper use of these loan to encourage the sale of these vacant properties can raise property values and improve the tax base in their neighborhoods. This loan is a win-win for all the involved parties and the community at large.

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