I am working with a buyer who is looking at homes in the under $150k price bracket. Three years ago this would mean a nice tent somewhere. Now you can actually buy big homes on land in this price range in Seattle. Wow what a difference a recession and real estate bubble make.
One of the most powerful tools buyers have right now is HUD’s 203(k) loan, which is administered by the FHA. In an email to my client today pointing him to the official HUD page that explains this type of loan, I called out a few specific things that sort of boil it down to what is most important in understanding this kind of loan:
- The borrower gets just one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work.
- Expenses eligible to be included in the cost of rehabilitation are materials, labor, contingency reserve, overhead and construction profit, up to six (6) months of mortgage payments, plus expenses related to the rehabilitation such as permits, fees, inspection fees by a qualified home inspector, licenses and consultant and/or architectural/engineering fees. The cost of rehabilitation may also include the supplemental origination fee which the mortgagor is permitted to pay when the mortgage involves insurance of advances, and the discounts which the mortgagor will pay on that portion of the mortgage proceeds allocated to the rehabilitation.
- Luxury items and improvements are not eligible as a cost rehabilitation. However, the homeowner can use the 203(k) program to finance such items as painting, room additions, decks and other items even if the home does not need any other improvements. All health, safety and energy conservation items must be addressed prior to completing general home improvements.
All rehabilitation construction and/or additions financed with Section 203(k) mortgage proceeds must comply with the following:
A. Cost Effective Energy Conservation Standards
(1) Addition to existing structure. New construction must conform with local codes and HUD Minimum Property Standards in 24 CFR 200.926d.
(2) Rehabilitation of Existing Structure. To improve the thermal efficiency of the dwelling, the following are required:
a) Weatherstrip all doors and windows to reduce infiltration of air when existing weatherstripping is inadequate or nonexistent.
b) Caulk or seal all openings, cracks or joints in the building envelope to reduce air infiltration.
c) Insulate all openings in exterior walls where the cavity has been exposed as a result of the rehabilitation. Insulate ceiling areas where necessary
d) Adequately ventilate attic and crawl space areas. For additional information and requirements, refer to 24 CFR Part 39.
(3) Replacement Systems.
a) Heating, ventilating, and air conditioning system supply and return pipes and ducts must be insulated whenever they run through unconditioned spaces.
b) Heating systems, burners, and air conditioning systems must be carefully sized to be no greater than 15 percent oversized for the critical design, heating or cooling, except to satisfy the manufacturer’s next closest nominal size.
B. Smoke Detectors. Each sleeping area must be provided with a minimum of one (1) approved, listed and labeled smoke detector installed adjacent to the sleeping area.
I can recommend very experienced professionals in the mortgage industry who can talk details with you for your specific purchase scenario. As a green housing expert I view the 203(k) as the single most important tool in turning around our housing market. There are a lot of older home just sitting there empty – some for over a year – and there should be people living in these structures and enjoying their lives in a healthy home. Just contact me with your questions about making your home more green or finding a healthy home to live in (even if you have to make it green yourself or hire someone to do it for you).