Urban Renewal Part Deux: Rehabilitation Loans

Whew! What an end to a crazy week! I opened “Dirty Rotten Scoundrels” at Broadway Rose Theatre Company, accepted 9 awards for the production of “Into the Woods” I directed at Lakewood Theatre Company, and had several mortgage puzzle pieces that required my full attention pop-up at the end of the week. And in all of the hubbabaloo, failed to submit my article on the exciting world of mortgages.

In order to catch up and make sure opportunities don’t pass by, I will submit two articles this week. The second will be about the possible benefits of refinancing in today’s market.

This article will be the conclusion to the previous episode on Urban Renewal areas. If you will recall, in order to help revitalize certain neighborhoods in Portland, the Portland Development Commission has set aside and made available, fund for those who wish to purchase a home in an urban renewal area.

The benefit of this in addition to having some financial help from PDC, in short, is that people who purchase homes before a neighborhood is the ‘in’ thing, could see their property values rise more dramatically than already established neighborhoods.

One of the challenges of purchasing a home in one of these neighborhoods is that many of these homes need work before any lender will consider granting a borrower a mortgage that is secured by that property.

FHA 203 (K)
A Loan program that was designed with situations like this in mind and is insured by the Federal Housing Administration (FHA) is known as The Section 203(K) program. The primary goal of this program is to create a tool that will aid in neighborhood revitalization through the rehabilitation and repair of single family properties.

In most loan programs, the lender uses the property as security for the loan. This is the reason that in addition to the borrower’s income, assets, debt and credit score, the subject property needs to qualify as well. Risk comes to a lender when a borrower has too much debt, not enough income, has a poor repayment history on existing or previous loans, or if the property is in need of repair. Statistically, homeowners are much more likely to walk away from a property if it needs repair than a house that is in good condition. For a property to qualify for a loan it has to be in very good condition. This is even more true with FHA Loans. Often times, the lender will have very specific repairs that need to be complete prior to granting funding for the property.

Under the 203(K) program, however, a lender will lend money not only the on properties current condition and value, but what the condition and value will be once specific repairs are completed. The program rolls all of these cost into one permanent loan. Out of that loan, the house is purchased and the contractor(s) are paid to complete the repairs.

For example, let’s say a house is on the market for $200,000. In it’s current condition it is worth $200,000. It needs $20,000 in repairs. After the repairs are completed, the home is estimated to have a market value of $230,000. Under most loan programs, the only way for this house to be sold would be to complete the $20,000 in repairs prior to selling the property. This requires the seller to have $20,000 available to him/her to put into the property prior to selling it. I don’t know about you, but I don’t usually have an extra $20K laying around. Under the 203(K) program, the lender might be able offer the borrower $220,000 to purchase the home and complete the $20K in repairs. The final figure is dependant on the type of repairs and the anticipated After-Improved value of the property.

Eligible Repairs
Not all repairs are eligible. In simple terms, only necessary repairs to the interior and the systems of the home are eligible. For example, painting, room additions, decks and other items even if the home does not need any other improvements are eligible.

All health, safety and energy conservation items must be addressed prior to completing general home improvements. For example, weather stripping, caulking or sealing all openings, cracks or joints, insulating exterior walls, and adequate ventilation systems would need to be in place before the money could be used for other general rehabilitation items. Also, replacing the heating, cooling and ventilation systems, and insulating the ducts and pipes must be completed prior to general rehabilitation items.

Luxury items and improvements are not eligible.

How it Works
After the loan is closed, the proceeds that are designated for the rehabilitation repairs are deposited into an interest baring escrow account insured by the FDIC (Federal Deposit Insurance Corporation). The interested that the account accrues is returned to the borrower.

An Inspection is performed after the rehabilitation repairs have been completed.

Upon completion of the agreed-upon repairs, the contractor(s) who performed the repairs and the inspector are paid directly by the escrow company.

Maximum Loan Amount
The maximum loan amount is the lesser of:
1. The “as-is” appraised value of the property, plus the HUD-approved cost of rehabilitation. The “as-is” appraised value is the value of the property prior to any repairs.
2. 110% of the “as-completed” appraised value of the property.

Final Word on Benefits
A potential benefit of this loan product is that the cost to purchase or refinance a property plus the costs of rehabilitation repairs can all be rolled into one loan. That means one set of closing costs. If a borrower needed to get one loan to refinance or purchase a property and another loan to perform the repairs, that would cost the borrower two sets of closing costs and fees.

It can allow people to purchase or refinance homes that most other loan products and lenders wouldn’t touch. Lenders qualify the property that is securing the loan they are offering just as scrupulously as they do the borrower.

It can put homeowners into neighborhoods on the cutting edge of revitalization and give them the potential of great appreciation value in their property in a shorter period of time than in more established neighborhoods.

It can allow people to refinance an otherwise un-refinancible (this is not a word) home and allow them to rehabilitate the property to a more desired level.

A Word of Caution
Before believing that this loan product is the salvation of everything, I offer the following cautions:

Interest rates are typically a bit hire than a normal FHA loan. This means the potential of hire monthly payments.

There is no guarantee that they neighborhood you buyer into will appreciate any quicker than any other neighborhood.

With any ‘as-is’ home, a thorough inspection needs to be done to determine the quality of the home and the fortitude of the structure. Foundation cracks or instability are not covered under the 203(K) program. The houses foundation still needs to be intact. The inspector should be able to uncover any potentially serious issues before they surprise you down the road.

As is the case with all of my articles, this is just the tip of the iceberg. This article is meant to give you an introduction into this topic and not intended to make you an expert. For more information please feel free to contact me at

Wade Willis
Loan Officer
Sound Mortgage, Inc.
503.819.8174 cell
971.327.9750 office
503.715.5700 fax
wadewillis@soundmtg.com
www.wadewillis.com