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VOL. 125 | NO. 228 | Tuesday, November 23, 2010

FHA Program Encourages Home Improvement

By Sarah Baker

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While many real estate agents advise homebuyers to address a home’s problems before closing on it, the Federal Housing Administration has a different approach.

As an alternative to conventional financing, the FHA offers a chance for buyers to obtain only one mortgage loan, at a long-term fixed or adjustable rate, to acquire and rehab the property.

While the loan, known as the 203(k), has been in existence since 1978, it’s making its way back onto the radar. Six banks in the Memphis area currently offer the loan, including Community Mortgage Corp., Magna Bank, Acre Mortgage & Financial Inc., Evolve Bank & Trust, Iberia Mortgage Co. and Wells Fargo.

Just as in other submarkets, Memphis has an enormous surplus of homes that are either foreclosed or up for a short sale, and in many cases the owners didn’t have the money to perform upkeep.

By offering an incentive for buyers to rehabilitate the homes, FHA hopes the housing market will improve and the foreclosure inventory will be absorbed.

Although borrowers might think only highly dilapidated properties qualify, that isn’t true, noted Mark Friedman, senior vice president division director of renovation lending at Magna Bank.

“The house doesn’t have to be falling apart, it doesn’t even have to be in a condition where it requires repairs,” Friedman said. “It’s not just an opportunity for more buyers to be able to purchase homes and make them more than livable, it’s opportunities for Realtors to expand their marketing opportunities.”

Friedman is teaching an introductory course on the 203(k) process for real estate professionals on Dec. 7 at Crye-Leike Realtors Inc.’s Quail Hollow office.

Magna Bank executive vice president Lisa Reid said her company has offered the loan for a couple of years, but has recently hired Friedman because of the increasing demand for the product.

The 203(k) program operates through FHA-approved lending institutions that submit property appraisal applications and approve the buyer’s credit. While FHA still shows a 580 minimal credit score, Friedman said a 640 is standard.

The property must be a one- to four-family house that has been completed for at least one year to be eligible. If a home has been demolished, part of the existing foundation must still be in place.

The lenders that offer the 203(k) are more limited because it is a more complex program, said John Gemmill, field office director for the Memphis office of HUD.

The pre- and post-appraisal process is ideal for someone wanting to make energy repairs in older Memphis neighborhoods.

“The greenest house is one that’s already been built,” Gemmill said.

Homebuyers can repair anything that is part of the main structure of the house, excluding luxury items, such as pools. Appliances are allowed as well, as long as the minimum repair requirement of $5,000 is met. In general, the work has to be done by licensed contractors.

“It continues to blow my mind when Realtors say they have been doing this for 15 and 20 years and never knew this program existed,” Friedman said.

Since the 203(k) is an owner-occupied product monitored by the FHA, the level of ownership is much higher, which in turn creates lower foreclosure rates.

“Typically, it’s a stronger bond between the buyer and their house, and they’re more dedicated to making sure that they stay there,” Friedman said.

And the program creates an economic ripple effect.

“You bring contractors and builders in where they’re making money, you bring homebuyers in where they buy houses that they didn’t realize they could buy, and you have Realtors making deals that they didn’t know they could close,” Friedman said.

PROPERTY SALES 51 223 1,152
MORTGAGES 55 189 861
BUILDING PERMITS 149 541 2,593