Repairs Within Reach
Saturday, July 18, 2009
The property damage wrought by foreclosure and abandonment almost cost Tammy and Lawrence Cole their chance to buy a townhouse in Potomac.
At first, Lawrence, an Air Force retiree, planned to use a no-money-down Department of Veterans Affairs loan, but a missing handrail by the front steps, water damage to a basement wall and a lack of appliances ruled out that source of financing. Neither the VA nor the Federal Housing Administration will lend if there are safety issues with a property, or if it doesn't have a functioning kitchen or bathroom.
And, because the bank that had foreclosed on the '70s-era townhouse refused to make the repairs, the Coles thought they would have to stay in their nearby rental. Moving to another neighborhood wasn't an option. "We wanted our son in Churchill High School," Tammy said. "We were willing to rent until he had graduated high school."
But then they learned about the FHA's 203(k) program, which allows buyers to borrow tens of thousands of dollars for repairs, as long as those repairs don't add so much to the purchase price that the debt exceeds the value of the completed home.
With just a $9,000 down payment -- and a few thousand more for an FHA consultant recommended by their lender, several appraisals and new appliances -- the Coles bought a $403,500 townhouse and financed $27,000 worth of renovations, including roof repair, mold remediation and new windows.
The FHA's rehab loan program has gained new life from the recent tidal wave of foreclosures, which has left a glut of damaged properties on the market. During the fiscal year ended in September 2008, the FHA insured 6,751 rehab loans. From October through May, it had already insured 9,791.
"Clearly, there's an enormous need for the program," said Andrew Moore, Bank of America's renovation lending manager for an eight-state district including Maryland, Virginia and the District.
The 203(k) loans are concentrated wherever there is a concentration of bank-owned properties, "which regrettably includes much of our area," Moore said.
That's a big change from what the loans were traditionally used for. Before the real estate bubble burst, they typically went to people buying boarded-up or long-neglected homes in transitional neighborhoods and doing gut rehabs, either to create a grand residence or, in recent years, for condo conversions.
Using a 203(k) loan, some borrowers have discovered, can be fraught with pitfalls. What the Coles saved in money, they paid in aggravation. Though they signed the contract Nov. 6 to buy the townhouse, they didn't close until Feb. 4. The three-month interim was filled with paperwork, confusion and problems.
In just one example of the confusion and setbacks involved, the contractor had written that he would be replacing "sheetrock," but the FHA consultant's scope of work used the generic term "drywall," and the agency rejected the paperwork because of the discrepancy.
Appraisals also caused delays. The FHA requires a second-opinion appraisal any time a property costs more than $400,000. The first appraiser said their planned repairs shouldn't cost more than $25,000. The second appraiser approved the full $27,000 budget, but Tammy said she didn't know until the day before closing whether the loan reviewer would accept the second opinion. "That was stressful," she said.