In the current real estate market, there is no shortage of prospective buyers who want to purchase a home and real estate agents who want to help them accomplish this goal. What there is a shortage of, however, is homes for sale.
According to the National Association of Realtors (NAR), there were just 1.93 million existing homes for sale in April 2017, a 9 percent decline from April 2016. This April also marked 23 consecutive months of year-over-year decreases in inventory, leaving unsold inventory at just a 4.2-month supply at the current sales pace.
A tight market like this leaves both buyers and agents frustrated. Homes that do go up for sale are going quickly; in April, they sat on the market just 29 days.
There was one market segment that didn’t sell quickly, however: distressed properties. Short sales had a median of 88 days on the market in April, and foreclosures took about 46 days to sell.
Properties that are distressed financially or just in need of repair generally tend to sit on the market longer, as buyers often want a turnkey home. But with low inventory dogging the market, buyers may want to take a second look at purchasing a home in need of rehabilitation or repair.
Agents who want to help these buyers should be armed with knowledge about what undertaking these kinds of projects means in terms of time, work and financing.
Potential homebuyers may be hesitant to undertake serious repairs because they are concerned about the expenses and how to pay for them, but there is a mortgage product designed specifically for this situation.
The Federal Housing Administration (FHA) 203k loan helps homebuyers finance both the purchase and rehabilitation of a home with one mortgage. Although this underutilized loan product can help real estate agents get more of their clients into homes, they first need to know how it works and could help their buyers.
Many buyers believe that undertaking serious repairs or modernization of a home will be a complicated and expensive process — and it can be. But with the 203k loan, buyers can obtain a single, long-term loan (with fixed or adjustable rates) to finance both the purchase and the renovation, instead of turning to interim loans that often have higher rates and balloon payments.
The 203k program also allows for the financed loan amount to include fees, repair costs and a contingency reserve. This loan covers repair and rehabilitation expenses ranging from minor updates (amounting to at least $5,000) to total reconstruction (provided the existing foundation system stays in place).
Improvements covered by the program include a wide range of projects, such as:
- Accessibility enhancements
- Modernization and functionality improvements
- Major landscape and site work
- Energy efficiency and conservation upgrades
- Replacing or repairing roofing, plumbing or electrical systems
However, the 203k loan is not without its challenges. Knowing the FHA guidelines and what is required will help real estate agents prepare their clients for the steps necessary to efficiently process the loan transaction and limit delays.
During the underwriting of the loan and prior to loan closing, some of the issues that could be encountered include obtaining required bids and cost estimates, confirming contractor credentials, obtaining the proper permits and completing all appraisal requirements.
Additionally, once these loans close, buyers could experience other unexpected issues that can lead to delays in inspection and draw disbursement checks, such as weather delays, a change of contractors or consultant, which requires undergoing the approval process again with credentials and validations, or unseen additional repairs that arise during the rehab process.
Buyers should also be aware that all repairs must be completed within six months of closing, and work cannot stop for more than 30 consecutive days (unless delays are weather-related).
In addition, potential homebuyers should know that the 203k will not cover foundation reconstruction or luxury items such as tennis courts or swimming pools.
Because this is an underutilized loan type, there is limited industry knowledge of how to process, underwrite, fund and disburse this product. Real estate agents interested in expanding their clients’ home prospects should be sure to partner with mortgage originators and lenders who are knowledgeable and experienced with FHA 203k loans.
These originators and lenders will be able to help your clients determine whether this loan product is the right financing vehicle for them and will help them navigate the complexities of financing a major home-repair project.
With housing inventory nearing historic lows, buyers in the current market are struggling to find the homes they desire, and new construction is not keeping pace with demand.
Single-family homebuilders are constructing new homes, but at a much slower pace: they are putting up 18 percent fewer homes than the 25-year average.
These market realities mean it may be time for buyes to consider houses that aren’t quite what they want but have potential to be something better.
With the help of the FHA 203k loan and experienced agents and lenders, homebuyers can finance the purchase of a property, along with the repairs and renovations necessary to make it the home of their dreams.