House: before and afterDuring the housing market collapse and Great Recession of 2008 many Americans lost their homes to foreclosure. Some of those mortgages failed because they were bad loans from the beginning.

Some of those failed mortgages were strategic. The homeowners reviewed their equity position and just decided to walk away. Others failed due to loss of borrower income from employer layoffs and general economic malaise

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Regardless of how they came about, foreclosures flooded the housing market from 2007 to 2011.

With the gut of foreclosures, many of which were in disrepair from the beginning, a long forgotten mortgage product began to make its way back into the mainstream mortgage market.

That mortgage loan is the FHA 203k renovation mortgage.

The Federal Housing Agency (FHA) was created in 1934. The goal? Make housing more affordable to middle class Americans.

Prior to the FHA, home buyers were typically required to make downpayments of fifty percent or more; and were required to repay loans in full within five years of closing.

The FHA and its loan programs changed all that. The agency launched a mortgage insurance program through which it would protect the nation’s lenders against “bad loans”.

In order to receive such insurance FHA required uniform guidelines on “property condition” which were typically determined by a satisfactory home appraisal.

Properties neglected and/or vandalized become ineligible for FHA financing – until the 203k.

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With an improved economy and resurgent housing market, America’s foreclosure inventory  is dwindling and the housing market is changing.

Does a resurgent housing market eliminate the need for FHA 203k financing? Not by a longshot.

In fact, with housing affordability issues creeping into many US housing markets and aging American housing stock, the FHA 203k is more important than ever.

Rising home prices equal high down-payments. Higher down payments mean that homeowners have less available funds to make repairs, take care of general maintenance and give the home the renovated touches that makes it their unique home.

The ability to finance your renovations at low mortgage rates – instead of depleting savings – and address deal killing “property condition” issues continues to be a mortgage financing vehicle that has importance.

So, what can you do with a FHA 203k loan? Quite frankly, a whole lot. Here are some of the issues you can address:

  • Structural repairs and alterations.
  • Items such as additions to the structure; repairing any and all structural damage.
  • Improvement in the functionality or modernization.
  • Such items as remodeled kitchens and bathrooms.
  • Changes for aesthetic appeal, and the elimination of obsolescence.
  • New exterior siding and new doors.
  • Repair of replacement of plumbing, heating, air conditioning or electrical system. Installation of new plumbing fixtures are acceptable, including interior whirlpool bathtubs.
  • Installation of Well and/or Septic System.
  • Must be installed or repaired prior to beginning any other repairs to the property. Properties less than one acre in size can be limited on this item.
  • Replacement of flooring, carpeting or tiling.
  • Energy conservation improvement.
  • New dual pane windows and doors, storm windows, insulation, and solar domestic hot water systems.
  • Major landscape work and site improvement.
  • Patios and terraces that improve the value of the property equal to the cost, or that are needed to preserve the property from erosion.
  • Improvements for easier accessibility to the handicapped.
  • Handicapped retrofitting can be included in the cost of rehab. This is particularly good to get this information into the hands of vocational rehab companies and companies that deal with disabilities. They may have a list of clients for you.
  • New cooking ranges, refrigerators and other stand alone appliances.
  • Painting and other cosmetic repairs.
  • Fencing, new walks and driveways, and general landscape work trees, shrubs or seeding).
  • Repair of an existing swimming pool, up to $1,500. Any costs exceeding $1,500 must be paid into the Contingency Reserve by the borrower.

 

NOTE: Items that will not become a permanent part of the property are not eligible. Luxury items are not eligible.

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The list above doesn’t cover all the available opportunities, but it does provide a good idea of what you can do.

The ability to address purchase deal destroying “property condition” issues, as well as customize your new digs to your specifications, is huge for many buyers.

You can pay a little extra every month and deduct the extra mortgage interest OR you can deplete your savings, rob your 401k or run up fresh credit card debt for those repairs.

For many would be homebuyers, the most fiscally responsible path is clear.

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