The Federal Housing Administration's (FHA) 203k mortgage program lets home buyers wrap their first mortgage and renovation costs into a single loan. The appraisal is based on the home value after renovations are completed, helping home buyers meet equity requirements. Because finding funds for renovation work is an obstacle, purchasing fixer-uppers without the program is difficult.
The U.S. Department of Housing and Urban Development (HUD) banned investors from the 203k program in the mid-1990s following revelations of fraud and waste. But recently, a push has been under way to reverse the ban. Both the Mortgage Bankers Association and National Association of Realtors have publicly urged HUD to reopen the program to investors in order to help further stimulate the housing finance market.
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HUD Secretary Shaun Donovan is on the record saying that the FHA intends to reopen the program to investors. HUD spokesperson Lemar Wooley confirms that the department is ‘currently evaluating options for reopening the 203k program to investors,’ but no timeline has been set for a decision.
Kim Shanahan, executive officer of New Mexico's Santa Fe Area Home Builders Association, is hopeful that the change comes sooner rather than later, noting that reopening the 203k program to investors will create jobs for home builders and meet the growing demand for rentals.
‘It just seems to be a win-win on many levels,’ Shanahan says. ‘It seems to be a no-brainer. Every person foreclosed on will be a renter by definition for at lease three years because they won't qualify for a home loan.’
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Across the industry, mortgage and housing professionals believe it is only a matter of time before investors will be able to use the program again.
‘The 203k loan is an excellent product for home buyers seeking to turn a distressed asset into the American Dream,’ says James Cromartie, assistant vice president of national business development at McLean, Va.-based First Guaranty Mortgage Corp.
‘We're excited about it,’ says Jeff Onofrio, director of renovation lending at AnnieMac Home Mortgage, based in Mount Laurel, N.J. ‘It's going to see 203k business in general really explode.’
AnnieMac created a dedicated division for the 203k program in the expectation that the program will be reopened to investors. Smaller down payment requirements will help more small investors purchase and rehab homes, Onofrio predicts, adding that even if down payments are larger than the 3.5% needed for owner-occupied properties, they'll probably be less than the 25% lenders now typically demand from investors.
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‘It would position us well to capture a lot of that business,’ Onofrio says. ‘There are plenty of guys out there who are good investors but don't have a ton a cash. I know plenty of investors out there like that.’
However, the lending parameters of a reopened program are uncertain. Paul Weldon, a Phoenix-area Realtor who runs 203kcontractors.com, a directory of 203k-certified contractors, points out that HUD officials have discussed requiring higher credit scores and larger down payments, requiring a consultant for each loan, and prohibiting the investor from also being the contractor on the same project. HUD might also limit the number of 203k loans an investor can have at once, and might reintroduce the program gradually, perhaps just to the department's real estate owned properties initially.
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‘How it's all going to be ironed out is anybody's guess,’ Weldon says, adding that he feels the investor ban will not be lifted until November, at the earliest. ‘There's a lot of variables that go into play.’
But even with so many questions remaining unanswered, enthusiasm about the program remains strong.
‘It's a really good idea – I think they should have done this a long time ago,’ says Joe Daly, national renovation lending manager at AmeriFirst Home Mortgage, based in Franklin, Ohio. ‘The 203k puts America back to work. It's a way to stimulate the economy.’
Michael Kling is a former editor of Secondary Marketing Executive and a financial journalist based in Stratford, Conn.