FHA 203(k) mortgage loans alluring for post-Sandy fixer-uppers
A federal mortgage loan program that covers the purchase of a house and the cost of renovating it might finally get the attention it deserves as a result of the widespread damage from Hurricane Sandy.
The Federal Housing Administration’s 203(k) program offers guaranteed loans for rehabilitating a primary residence, either as part of the purchase or a refinancing.
As Fred Verna, of Margate, found out, you can’t get a conventional mortgage on many storm damaged houses.
He and his daughter, Kendall, bought a home in Margate last month, which when it’s fixed up will become her home after her marriage in June 2014.
“This house had some storm damage, but minor, not extensive,” Fred Verna said. “But part of what they did in the demolition of the damaged area was they removed the kitchen.”
Verna asked around about financing possibilities and the Realtor for the house, Lisa Alper-Russo of Coldwell Banker in Linwood, put him in touch with Acre Mortgage and Financial in Galloway Township, which has been originating such loans since 1993.
Under the guidance of Tom Schindler of Acre, Verna got an estimate for restoring the house from Cristaldi Builders, of Margate. He said he liked the work Michael Cristaldi did on his own house previously.
Acre and the Vernas applied for a 203(k) mortgage to cover the $250,000 purchase price and the $50,000 rehabilitation cost.
With Fred Verna’s diligence with the paperwork and the expert 203(k) guidance of Acre’s branch manager, Frank Montufar, of Absecon, the closing was completed late last month only 45 days after the initial application.
The time it takes to secure an FHA purchase and rehab loan is one reason some shy away from it, lenders said.
Emily Angela Goldberg, of Vineland and manager of the Gateway Funding Diversified Mortgage Services branch there, said she tells people the 203(k) process can take two to three months.
Gateway is one of just three FHA-authorized originators of 203(k) loans in the region, along with Acre Mortgage and Wells Fargo Bank’s mortgage office in Linwood.
Montufar said the mortgage developed a stigma in the 1990s for requiring a long and difficult application process, but that is no longer justified.
“We’ve streamlined it and do a lot of them,” he said. “I run the 203(k) loan department so my job is to make sure the process is smooth and the paperwork runs along.”
Still, there seems to be little knowledge of or interest in this guaranteed loan with a down payment of just 3.5 percent, typically a 30-year mortgage at market interest rates that are now under 4 percent, and with zero points.
“Tommy and I have closed on 1,000 of them in the last 20 years, which is a disgrace for a program like this,” Montufar said.
He doesn’t blame the FHA, because its job was to set up the program in 1993 and run it thereafter, not market the loans.
“It’s the lenders’ job to get the world out and originate the loans,” he said.
But with just three originating lenders in the region and each also offering other more popular mortgage programs, the lack of 203(k) marketing is understandable.
Goldberg said Gateway gets a lot of calls about the program, almost invariably from people seeking to fix up one of Cumberland County’s vintage houses as part of a purchase or refinancing.
She said the process requires getting the contractor’s estimate of the rehab costs, getting the buyer prequalified for a mortgage to cover the purchase price plus the rehab costs, and then getting an FHA appraisal to make sure the numbers work and match the reality of the house.
“Also, an FHA inspector comes out and might spend the whole day there, making a punch list of what needs to be done to get it up to FHA standards,” Goldberg said. “That’s what takes the longest.”
She said at closing, the 203(k) loan is like a construction loan, with the first draw of the mortgage money going to buy the house and put the deed in the new owner’s name.
Then subsequent draws are made to pay the contractor for rehabilitation work as it is completed.
Fred Verna said he expects to have the work done and turn over the Margate home to his daughter in mid-fall. “If I get itchy, it might be done before that.”
Schindler said FHA appraisal, which estimates the value of the house after the work is completed, often results in buyers immediately having equity in the home.
The appraisal on the Verna house, which is costing $300,000 to buy and rehabilitate, “came in at $380,000, so they’ll have $80,000 in equity,” he said.
Montufar said the 203(k) would be useful for a lot of houses, whether dealing with storm damage or just the cosmetics from age.
One thing that might make it more popular is if investors are able to use it again, as they were in the first few years of the program.
“There’s a lot of talk out there that the FHA is going to open the market up to the investor program again,” he said.
Meanwhile, buyers or refinancers of a primary residence might find it useful, especially if they’re among the many dealing with storm damage.
“It’s a good loan, but everybody involved has to be patient,” Goldberg said.
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