BECAUSE OF A PRODUCTION PROBLEM, SOME TEXT WAS DELETED FROM A REAL ESTATE ARTICLE YESTERDAY ON THE 203(K) SPECIAL MORTGAGE PROGRAM. THE PROGRAM, OPERATED BY THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT'S FEDERAL HOUSING ADMINISTRATION, IS DESIGNED TO PROVIDE PEOPLE WITH THE MONEY THEY NEED TO REHABILITATE HOMES. MARK AND SUSAN PARKER, PARTICIPANTS IN THE PROGRAM, USED 203(K) FUNDS TO REPAIR THE HOUSE THEY BOUGHT. THEY ALSO INSTALLED NEW TILE, CARPET AND DRYWALL IN THE FIVE BEDROOM, 2 1/2 BATH RAMBLER. THE ARTICLE CONTINUED ON PAGE G6. (PUBLISHED 07/18/99)
Mark and Susan Parker were living in a trailer when he saw a house for sale that had been empty for a year or two. The Stafford County home had damage from a flooded basement. It had been vandalized, and all the windows were missing or broken. Someone had painted over the wallpaper and paneling.
In other words, it was a mess. It was perfect for the 203(k) program.
The 203(k) is a special mortgage program operated by the Department of Housing and Urban Development's Federal Housing Administration. It's designed to provide people with the money they need to rehabilitate homes. It's almost always referred to by the number and letter of the law that created it, like a 401(k) plan.
The program, begun in 1961, is available to buyers who want to acquire and fix up a house, or to people who want to renovate the home they already own. Mortgages obtained through the program include enough money for repairs.
For example, using their 203(k) loan, the Parkers this year bought the beat-up house for $77,000, including their $3,450 down payment. It had sold for $113,000 in 1995, before it deteriorated.
The Parkers spent another $34,000 to get the place in shape. Mark Parker, a concert roadie, had both the time and knowledge to do the repairs himself. He has installed new tile, carpet and drywall in the five-bedroom, two-and-half bath rambler. The air-conditioning and heater units were undersized, so he changed from all-electric service to gas with a heat pump for a backup. One bedroom and part of the kitchen have been converted into an entertainment area with a full-sized pool table.
In total, the Parkers have put $111,000 into the house. Mark Parker figures it should appraise at $135,000 to $140,000.
Kathleen Zaffina, who works for Radio Free Asia, also bought her house in Takoma Park this year using a 203(k) loan. She calls it, "my slice of the American dream."
Until now, she said, she always has lived in apartments. She wasn't house hunting when a good friend, "almost family," told her the house next door was for sale. The husband had died and the widow didn't want to keep the house.
The four-bedroom house was at least 30 years old; besides some tender loving care, it needed new siding, furnace, deck, some trees removed and the carpeting replaced.
Besides those renovations, Zaffina also used the 203(k) loan to install insulation, a pull-down ladder and plywood flooring in the attic to increase storage space. She added thermostatically controlled fans to cool the space. A self-proclaimed pack rat, she will finally have room for all her "stuff."
Zaffina bought the split-level house for $115,000. The work cost another $30,000. She estimates the final appraisal will come in at $156,000 or more.
Most people get into the 203(k) program by working with a real estate agent familiar with the loans who can recommend an approved mortgage company. Zaffina was introduced to the program by Acorn Housing Corp., a nonprofit group that works with first-time home buyers. The group gives seminars on home buying and provides financial counseling.
The seller does not have to do anything different from other sales that involve FHA financing. Such sales can require more in-depth inspections than with conventional financing to ensure the house meets FHA health and safety requirements; sellers also frequently pick up some closing costs. The home, though, must be eligible for the 203(k) program, which means it needs at least $5,000 in repairs.
Most frequently, the program is used for home purchase and renovation, but it also can be used to make a home handicapped-accessible. Any single-family house or two- to-four unit building that has been constructed (and received a certificate of occupancy) for at least one year can be included. Condominiums are included, but just interior improvements, not common areas. Both homeowners and investors can participate.
The loan program is designed to bring older housing up to current codes. There are regulations regarding what must and what cannot be done. A "broken" swimming pool can be repaired, but a new pool cannot be constructed. Smoke detectors must be installed in or near every sleeping area. A minimum of $5,000 must be spent on improvements that affect the health and safety of the occupants, and that will bring the home into compliance with HUD standards. (See the Minimum Property Standards in HUD Handbook 4906.1, available online at www.hud.gov or by calling 1-800-767-7468.)
Zaffina's loan officer, Raj Nanan of North Atlantic Mortgage Corp. in Silver Spring, said there are advantages to both the seller and buyer with a 203(k) sale. The seller doesn't have to spend a lot of time and money fixing up the house. The buyer gets to create the home he or she wants in the desired neighborhood instead of looking at new homes. And the buyer usually has instant equity in the home, something that would otherwise take years of mortgage payments.
The Parkers' loan officer, Denise Tayloe of the Annandale office of North American Mortgage Co., said that about 40 percent of her business is in 203(k) loans. She said that sometimes a real estate agent might not suggest this program to a seller because a home is easier to sell if it's in condition to move in, and more people are looking for that.
Sellers with homes in need of repair can market their properties to would-be buyers interested in 203(k) loans, she said. She recommends that sellers who want to do that hire a consultant familiar with FHA requirements who can do a pre-inspection and put together a package of repairs that would be needed.
"When the home goes on the market, the seller should provide prospective buyers with a package with pictures and layouts of what the house would look like with those improvements, so the potential buyer can see the results, and have an idea of the work that will be involved," Tayloe said.
As for buyers, she said, "You're not always going to find a bargain-basement deal, but when you do, you're going to get it so far below its after-improved value that it's worth it."
After a prospective borrower applies for a 203(k) loan, a HUD-approved inspector visits the home and provides a feasibility study to determine if the work can be completed with the money that will be available. The inspector will furnish a list of work to be done, make suggestions for improvements, create a drawing of the improvements, cost out the projects and provide a list of suitable and interested contractors.
The 203(k) program used to be known for its cumbersome paperwork, but HUD simplified that in 1994. The mortgage loan limit for this area also used to be a low $154,000, but that was increased to $208,000 several years ago.
At least one problem still exists, according to some people familiar with the program, and that is the way contractors are paid. They do the work before they are paid, following an approved schedule of repairs. A certain amount of work must be completed, inspected and approved before the corresponding amount of money is paid out. Payment usually comes a week or two after approval. Usually, there are three to five inspections during the work schedule.
That can make it difficult to find a contractor to work on a 203(k) project--Zaffina said for part of her job, she called five contractors and only one showed up.