Mortgage loan designed for fixer-uppers and home improvements

Mortgages for home improvements

If you're attracted to old houses, foreclosure bargains or fixer-uppers, you may already have encountered a snag with the financing of your project. Even the best mortgage lenders often won't lend you the funds you need to buy the property until the necessary repairs are done to their satisfaction. And you can't begin your home improvement program before you've bought the place. As the U.S. Department of Housing and Urban Development (HUD) puts it, that's a "Catch-22 situation."

Well, it is if you don't know about The Federal Housing Association's (FHA's) 203(k) program. And there's a good chance you don't, because it receives very little publicity, even though it's been around for more than 30 years.

203(k) basics

One recent exception to that low profile was a piece that appeared in The New York Times on October 15, 2010. This explained some of the ground rules for the program, although more information is available on HUD's Website. The key points are:

• The home doesn't have to be a ruin--any property that would be appraised at below its market value before the repairs, and at its market value after, could qualify.
• You can't use the funds for exotic luxuries, but the Times gives examples of the sorts of things covered: new heating system or roof; upgrading the interior; replacing an old kitchen floor.
• You may have to pay slightly more than average current mortgage rates.
• There are extra closing costs (roughly $1,000) to cover the additional inspections required by the program.

203(k) process

Another HUD document explains the process of securing a 203(k) mortgage loan, which differs somewhat from a normal purchase:

1. Sign a sales contract for the home you wish to buy, subject to approval of your 203(k).
2. Find an FHA-approved lender, and submitted a detailed proposal, including a schedule of works and full cost estimates. Your contractor and loan officer can help.
3. An appraiser determines what the market value of the home is likely to be after the work has been completed.
4. The loan covers the purchase or refinance cost of the property, the value of the work, a 10-20 percent contingency for unforeseen necessary works or overruns, and allowable closing costs
5. Take possession of the home and start making mortgage payments.
6. The repair funds, which will have been put into an escrow account, are drawn out as each remodelling phase is completed.

Mortgage for DIY home improvements

A third HUD document outlines what it calls the Streamlined (k) program. This is principally designed for current homeowners who wish to undertake less wholesale repairs and home improvements--including Do It Yourself--without dipping into savings or finding a home equity loan.

The total repair mortgage is capped at $35,000, and can cover a surprisingly broad range of improvements, including replacing, repairing or upgrading:

• roofs
• gutters and downspouts
• floors
• plumbing and electrical systems
• HVAC
• windows
• disability access

That's a small sample from a long list that even includes the purchase and installation of appliances, such as microwave ovens, dishwashers and washer/dryers. Again, these loans are only available through FHA-approved lenders, and inspections of work may be required.

With so much of the nation's housing stock in a poor state of repair owing to foreclosures and tight credit, many will be pleased that there is a program that helps home buyers and owners to restore, renovate and remodel properties. It's just a shame that so few people know about it.