Typically, the FHA borrower may not have sufficient funds set aside to deal with repairs, hence this program is available for those specific needs.

Here is an excellent post by a fellow blogger and Mortgage Broker, Bill Ladewig,  discussing the multiple uses of the  FHA 203K loan.  A great product

SM

Rebuild this home with a FHA 203(k)

One loan finances the purchase and improvements. The FHA 203k includes the cost of rebuild, rehabilitation or home improvement in a purchase or refinance loan.  .

The 203(k) is a great marketing tool for real estate agents that provides added value.

While it is a great tool to rehabilitate trashed REOs it also can be used to upgrade homes.

The primary criteria are: the improvement is a permanent part of the real estate and the improved home’s value must be comparable to similar homes in the neighborhood.

There are many uses for the 203(k)

• Rebuild
• Rehabilitate
• Remodel kitchens and bathrooms or…
• Add Rooms
• Move homes to new lots. •
  • 203k cannot be funded until home is permanently secured to new foundation.
• Start with an existing bare foundation and build a new home.

Underwriting guidelines for borrower are the same a regular FHA

• Must be owner occupied
• There are no borrower income limits.
• No purchase price restrictions
• Subject to local FHA loan limits.
• Borrower’s minimum investment is 3.5%

FHA 203k are not overly complicated.

The final loan amount will be 96.50% of the purchase price and cost of repairs plus a contingency pad

The purchase contract is written based upon the purchase price.  I suggest, to avoid seller confusion, the purchase offer loan amount to be 96.50% of the purchase price with a notation the loan amount will be increased based upon repair costs.

Once the offer is accepted repair bids are prepared by licensed and bonded contractors.  If the bids are over $35,000 a FHA 203k inspector must review the property and bids; below $35,000 no FHA inspector is required.

• Purchase price plus construction costs CANNOT exceed the value of comparable homes in the area.
• The contractor must understand the bid must be accurate because there will not be any additional money available.

After the construction bid is accepted, it along with the purchase contract is sent to the FHA appraiser.

The time to complete a FHA 203k is dependent on the time required to prepare the construction bid.  Once the construction bid is accepted the time to close is the same as a regular FHA loan.

Education is Consumer’s Only Real Protection.

• What You Should Know About APR
• How To Shop for Mortgage Rates.
• Beware of Misleading Lender Advertising
• Education is the best consumer protection
• Rates and Point Relationship Explained

Bill Ladewig

800.664.7283 (SAVE)

Bill@YourFhaGuru.com

Website

Many naysayers poo poo’ed the program, saying it was never going to fly and that lenders would not abide by the terms because it was not in their favor.  But you know, there always will be naysayers whose job it is to simply criticize any new idea that comes along which challenges the status quo.

Yes, there are still glitches in the system and many employees of banks do not understand or have not been trained in HAFA and we get to deal with a high percentage of them who are not helpful.  However, an announcement made last night will resonate and have long term impact on the dynamics of the distressed properties marketplace, in my opinion.

Matt Vernon, the executive in charge of short sales and REOs at Bank of America (BofA) announced that institution will now focus on short sales to liquidate their assets before they get into foreclosure.  “We’re going to do everything possible to liquidate property prior to foreclosure,” Vernon said. “REO will still be available, but we will do everything we can to do short sales.”   This is wonderful news for consumers as their underwater properties can be disposed of without having to be forced into foreclosure and devastating their credits.  This is also good for banks because industry surveys have shown that nets proceeds to banks are significantly higher when short sales are utilized as compared to REOs.  BofA is of course is still in the business of making money and has chosen a profitable method, but this method also benefits the homeowners as well. And with all of the loan modifications applications out there, and the unfortunate reality is that a large percentage of those loan modifications will default and end up on the foreclosure circuit.

Mr. Vernon has spoken previously and have been pushing for the notion of short sales taking a more prominent role at BofA. BofA was suffering  from backlash on their Loan Origination business as a consequence of them developing a notorious reputation in the short community as being difficult to work with.  This move will be followed by other banks in my opinion, like airlines follow and match fares when one major player comes out and takes a stand.

HAFA may not have lived up to the expectation people had about its efficacy in making  short sales easier to handle or process, but what it has done is provided an environment where a big player like BofA can come out and concentrate on short sales as a major tool to unload their real estate portfolio.  This move on the part of BofA has now pushed short sales out of the niche market and pushed it into the mainstream, making it easier for consumers to get short sale approval, and hopefully quicker too. Now here is truly a win-win solution for all involved parties.

This trend will increase rather than decrease because of what is coming down the road.   Starting next month (scheduled for April 5, 2010), distressed homeowners and their lenders may start receiving financial incentives if they agree to a short sale. The Federal Government has come to the conclusion, if you cannot qualify for a loan modification through HAMP, then the next logical step they encourage is a short sale through HAFA.  Starting next month, those same homeowners and their lenders may start receiving financial incentives if they agree to a short sale.

I went to the MLS and pulled all of the active listings on one hand and pulled all of those same properties which were listed as either “short sales” or “REO”s.    The data below are for all Single Family and Condo/Townhomes in Santa Clara County that are active as of today, November 11, 2009.

The answer to  the question I posed above is 30%. The ratio for distressed properties to all active properties is 838/2780 or 30% by my calculation.  It will be interesting to see if this percentage increases or decreases in the coming months.

Distressed Properties

All Properties

I first pulled all of the particular types of property (either Single Family Residences or Condo/Townhomes) which were in active status  today in Santa Clara County.  Then I pulled from all of the same properties the ones that were identified by the listing agents as Short Sale and as REO (bank owned properties) to get the results.

The numbers were significant, but a bit less than I had anticipated.

Single Family Residences – Total Distressed Properties represented 26% of the properties for sale.

Condo/Townhomes - total distressed  properties represented 33% of the properties for sale.

Given the high rate of unemployment in California and the current status of the Alt-A and Option ARM loans resetting in the coming months, I believe, unfortunately,  this number will steadily increase.