Two little known and little used loan programs from the Federal Housing Administration are beginning to gain traction among home owners and remodelers who are using them to purchase, repair and remodel foreclosed or distressed homes.

Within the last year, more than 3,300 home owners and remodelers began using the FHA’s 203(k) Rehabilitation Mortgage Insurance and Streamlined 203(k) Limited Repair Program to purchase and make essential improvements, and in some cases, additions to homes than in the year before.

During fiscal year 2008, 6,400 mortgages were issued under these programs compared to 9,791 during just the first seven months of FY2009.

The differences between the programs essentially involve the size of the available loans and the types of repairs or remodeling that can be completed.

The streamlined 203(k) program was created to remodel homes that require less expensive repairs. Loans for a maximum $35,000 are issued under the program and repairs can be made before the home owner moves into the home.

If more comprehensive remodeling is needed — such as structural repairs, roofing repair or replacement, the elimination of hazards or home modernization — larger loans are available under the FHA’s companion program, the standard 203(k) rehabilitation program.

When remodeling homes under these programs, the property value must remain within the FHA mortgage limit for the area once the rehabilitation or repairs have been completed. The value is calculated by either adding the cost of rehabilitation to the original property value, or as 110% of the appraised property value following rehabilitation, whichever is less.

Bank of America and Wells Fargo are two of leading lenders for the 203(k) programs, though not all banks and lenders participate.

Wells Fargo provides loans through its Purchase & Renovate Program, which allows home buyers to purchase a home and remodel it using a single loan. The amount the home owner can borrow is based on the increased value of the home after remodeling.

Frank Malpere, CGR, CGP, CAPS, CGB, of Quality Building and Remodeling in Effort, Pa., used a standard 203(k) loan to finance the purchase and rehabilitation of a home.

“We did a gut rehab, including adding new carpets, drywall, a roof and a fireplace. It was a foreclosure that had been left sitting, so there was extensive damage,” said Malpere.

“It was just like doing any other job, except that a loan consultant verified the work,” Malpere said. The loan consultant was required to be HUD-approved, he said.

When Malpere completed a stage of the remodel, the consultant would inspect the home to verify the work and approve the payment draws. Malpere said he received fast and timely payments on the four draws he had scheduled.

Since his first experience with the 203(k) mortgage, Malpere has received several calls a month from home buyers interested in using his remodeling firm for similar projects. He already has submitted several bids on future 203(k) home remodels.

“Home owners and their neighborhoods benefit from the improvements these loan programs make,” said Tom Corzine, a renovation marketing growth and development consultant for Wells Fargo Home Mortgage. “Investing in a home contributes to the financial well-being of the owners, and it certainly contributes to the financial well-being of a community because the owners are preventing these older homes from deteriorating.”   

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