Using the FHA 203k loan
By Steve Aranda
If you’re out shopping for a home today, chances are you’ve had to learn some insider jargon that you would never have heard of two years ago.
Terms like Short-Sale and REO seem to be the words of the day in today’s real estate market. And if you aren’t up to speed, you might be missing out on some of the best opportunities out there. REO stands for Real Estate Owned – not owned by you, but by a bank.
These are homes that went through the foreclosure process, and weren’t purchased by anyone when the bank tried to auction them off at the county courthouse steps.
When this process fails to liquidate a property, the bank becomes the new – and not too happy – owner of that property. Depending on the area you live in, a large percentage of every sale that takes place can be a REO. REOs represent their own unique set of difficulties when you want to buy one.
One such difficulty is what to do when you’re trying to buy a REO that has repairs needed. The problem looks like this: The bank you’re getting your loan through won’t fund your loan until the repairs have been made. The bank selling the property won’t let you make the repairs until your loan funds. A Catch 22 if ever there was one.
Realtors working the REO market know this scenario all too well. In order to close these transactions, agents are resorting to means which are questionable at best, and in some cases, jeopardizing their licenses.
Listing agents commonly turn a blind eye to buyers who go into the property and complete repairs with their own funds, so that the lender considering making a loan on the property will be satisfied.
Not only is the agent’s license at stake when this is done, but if for some reason the transaction fell through, the would-be buyers are out all of the money they spent on the repairs. But there’s a better way.
The FHA offers a loan called a 203k, which lends prospective borrowers all of the money they need to buy a home, as well as the funds to repair or improve it.
The proceeds from a 203k loan can be used to remedy problems with a home such as missing doors, broken windows, non-functional heating units, and damages done by the previous owners.
It can also be used to improve properties that are already in livable condition. Upgrades that add to a property’s value – things like kitchen remodels, energy efficient windows, new paint, and additional square footage – would all qualify under the FHA 203k loan.
Because of sky high prices in places like L.A. County, as well as the abundance of alternative lending products that were available for such a long time, FHA loans were relatively unused until a couple of years ago when the government agreed to raise the loan limits.
Loan agents who got into the industry in 2001 or later – which is a large percentage of the loan agents in California – likely have very little experience with the FHA and the types of products it has to offer.
Additionally, most traditional mortgage brokers aren’t allowed to do FHA loans due to the government requirement that all loan agents working for a company licensed to do FHA loans be W2 employees and not 1099.
All this makes for a lending environment with precious few loan agents or realtors with any real expertise in FHA lending, and particularly in the 203k specialty niche.
So when you come across that potential home of your dreams, the one that’s almost perfect (but for a little TLC), don’t hesitate to make an offer on it. Just be sure that you’re approved for your loan with an experienced mortgage banker, who’s fluent with FHA lending, and be sure to ask about the 203k.
Steve Aranda is an experienced mortgage banker who specializes in Government Lending, and Private Mortgage Banking for Super Jumbo products. Write him with questions at email@example.com