The National Association of Realtors reported that the nation’s housing sales inventory totaled 1.88 million existing homes at the start of September, a 6.5 percent decline from nationwide market listings one year earlier. The volume of existing home sales has fallen year over year for 27 consecutive months.
Meanwhile, the U.S. Census Bureau and Department of Housing and Urban Development (HUD) in September reported declines in single-family home housing starts and completions.
With fewer new homes being built and a shrinking inventory of available homes, some borrowers are turning to the Federal Housing Administration’s 203(k) loan program. Introduced in 1978, the FHA program enables a homebuyer to borrow funds that will cover both the price of the home purchase and the cost of property repairs in a single loan.
The FHA is not a direct lender, but instead insures the mortgages for the lenders that offer the product, which is available as a 15-year or 30-year fixed-rate mortgage or as an adjustable-rate mortgage.
There are two versions of the 203(k) loan: a limited one for renovation and upgrade projects valued at less than $35,000, and the standard one for extensive repair work with estimated costs exceeding $35,000. The total value of the property must fall within the FHA mortgage limit for the area where the house is located. Qualified buyers must have a credit score of at least 620 and be able to make a down payment amounting to 3.5 percent of the total loan sum.
Ann L’Altrella, a loan officer with Network Funding LP in Shelton, credited the 203(k) loan program with helping in the sale of older homes that are either stuck in an aesthetic time warp or need more than cosmetic help.
“A lot of houses on market now have not been updated,” she said. “With this renovation mortgage, a new homeowner will not have to look at those 1940s or 1950s bathrooms with pink or green tile. Or if you have a cracked foundation, this can help fix that problem. You can use it for anything you want.”
But the loan program also comes with extra work for the parties involved in the property renovation. “The builders have to fill out paperwork and they hate that stuff,” said L’Altrella. “They’d rather work with their hands than writing.”
The federal agency also required an on-site review of the prospective renovations by a HUD-certified housing consultant prior to financing. Brian McNamara, a loan originator at Westport Mortgage LLC, said that is a plus for the 203(k) program.
“The HUD consultant does a lot of work,” he said. “Not only does the consultant protect the bank, he also protects the buyer that is working with a contractor. The consultant can determine if the contractor’s bid is too high or too low, which could mean the contractor is not using proper materials for the project. This is an extra layer of protection.”
That protection comes with an extra layer of cost for homebuyers. “The rates on these loans are a little bit higher,” McNamara said. from 0.25 percent to 0.50 percent above the standard mortgage rate, which was 3.88 percent for a 30-year fixed-rate mortgage as of mid-October.
Michael Barbaro, president of the Connecticut Association of Realtors Inc., said some contractors are displeased by delays in receiving payment for their work in the 203(k) program. For most home renovations, “Most contractors get a large deposit and are then paid upon completion of their work,” he said. “Typically, with the 203(k), when the work is done you send a request to the FHA or the lender to inspect the work that is done and then payment is disbursed.”
Norbert Deslauriers, managing director of homeownership at the Connecticut Housing Finance Authority (CHFA), noted that lenders do not have the option of handing off their 203(k) loans to a third party for servicing. “After the loan closes, the lender has to service the loan,” he said. “And a lot of lenders do not service their own loans.”
There is no data on how many 203(k) loans are being originated in Fairfield County, but apparently the number is low. Only three lenders on the CHFA’s list of participating 203(k) lenders are based in Fairfield County, and only nine of the 31 HUD-certified 203(k) consultants in Connecticut have offices in the county.
The county’s pricey residential real estate often makes properties ineligible to qualify for the FHA program.
“The biggest problem is the FHA loan program in Fairfield County tops out at $601,450,” said Mark Pruner, a Realtor at Berkshire Hathaway Home Services in Greenwich. “We are limited with that price. In Bridgeport, Danbury and some other places there are a significant number of houses under $600,000. The concept is good, but it just doesn’t work on the Gold Coast and in most of Fairfield County.”
Financing through the FHA loan program “is more work on our end and it
takes up more time,” said L’Altrella at Network Funding. “A lot of mortgage people just want to get loans in and out. But we want to do what makes sense for the borrower.”
Barbaro said borrowers ultimately come out ahead with the FHA’s combined home purchase and renovation loan.
“Overall, this is cheaper than buying a house at the standard rate and then going to the bank for money or borrowing on your credit card,” he said. “I think this is a great program that more people should be using.”