Recognizing the Need For 203(k) Rehabilitation Financing

What is it about the HUD Section 203(k) Rehabilitation Loan program, commonly 203k, that causes home purchasers to shy away from this program as a practical and cost-effective method of financing their purchases? I have had many conversations on the subject of 203k mortgages and, in at least twenty percent of the time, people I've spoken with didn't "want to be bothered" with the 203k loan.

Could it be that they were unaware of the program? Or not as familiar with it as they would've liked to be? Could it be that they were dissuaded by others out of fear that it may be too complex and could cause unnecessary delays? Some real estate brokers believed that delays lead to the loss of income, which is a well-founded belief, but knowledge of the program could easily dispel that notion. Whatever the reason for this reluctance to finance home purchases with the 203k, let's take a closer look at the program in an attempt to allay some of those fears.

First, let's discuss what the program is and what it is designed to do. To do this we'll have to briefly outline what is entailed in a regular 203b or conventional mortgage. Normally, the mortgage application process consists of four basic stages: Loan Origination, Loan Processing, Loan Underwriting, and Loan Closing. During this process borrowers are asked to meet specific, documented requirements relating to income, assets and credit. This information is combined with property data, such as the property type, value, and title in order to complete a loan package that can be approved.

The 203k mortgage program entails the procedures above with one addition. The borrower is asked to provide to the lender, a work estimate prepared by a licensed and insured contractor which must meet HUD's minimum repair cost requirement of $5,000 for the work to be completed on the property. Repairs are identified by the borrower and documented work write-up format prepared by a HUD-approved 203k consultant. Completion of a 203k work write-up by a HUD-approved 203k consultant is required by HUD/FHA and is necessary to keep repair costs in line with HUD's fair market prices.

The question therefore, is how much time is added to the processing of a 203k mortgage application because of the repair cost stage being incorporated into the process? How much more complex will the process become? Will more home buyers elect to use the program for their home purchases if they were more familiar with the process? Will they allow themselves to be dissuaded if they learn about how the program can be beneficial to them in the short term as well as the long term? Let's look at what the program accomplishes.

There is a full list of repairs outlined on the HUD website www.hud.gov so I won't go into the repair specifics here, but I can point out that the $5,000 minimum repair cost required for a property to qualify for a 203k rehabilitation loan can be used to seal air infiltration areas in the home and prevent loss of heat during the winter and cool air during the summer. In either case those types of repairs can make a significant difference in the dollars coming out of a homeowner's pockets to pay for energy costs. What if the property is in need of new plumbing, or electricity upgrade? The 203k pays for those repairs also. Most repairs that a property may need are financed in the 203k mortgage.

The most important benefit home buyers can derive from using the 203k program to finance their home purchases? Not having to pay for expensive repairs in one lump sum, out of their own pockets, during the first year of home ownership; and if they are able to finance the repair of major working components during the purchase, perhaps they wouldn't need to worry about any repair expense for years after closing.

So, if you are in search of a home and you're considering different financing options, you could save this article to be used as a reminder that, there is a lot to be gained and very little to lose by choosing the 203k mortgage to finance your home purchase. A little additional time taken to get the job done right, which in turn is to your benefit, can hardly be considered losing anything.