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A Mortgage Program Tailored for Rehabs 

12-09-2015 17:35

How many preservationists have wished they could get just ten minutes alone with a high-level official of the Department of Housing and Urban Development (HUD) and get them to really listen to their needs? The request would probably go something like this:

"What we need is a flexible loan program that helps developers, investors, and families at all income levels to buy and restore properties in urban and rural historic districts. The loan must help preservationists deal with problems like appraisal barriers, the high cost of second mortgages, and prohibitive downpayment and closing costs. Last, but most important, we need to make it user-friendly, without the usual red tape."

At the HUD/Preservation Roundtable hosted last fall by National Trust President Richard Moe and HUD Secretary Henry Cisneros, preservationists not only shared these needs with HUD administrators, but also received a sympathetic response. The officials said that HUD already had just such a program--the 203(k) Mortgage Rehabilitation Insurance Program.

Those of us in attendance who were familiar with this HUD dinosaur could hardly disguise our skepticism. After all, this federally insured purchase/rehab home mortgage program was instituted during John Kennedy`s first year as president (1961). How could a national Federal Housing Authority (FHA) program that closed only 5,382 loans during its first 29 years be of much relevance in the face of the vast need for older-home loans?

Well, after follow-up discussions with FHA officials, a thorough reading of the loan`s features, and the observation of one family`s experience using a 203(k) loan to buy a home in a National Register historic district, it appears that this dowdy, middle-aged loan product has been greatly improved. The improvements in design are reflected in much higher loan production figures for fiscal year 1995, during which 203(k) loan endorsements have already exceeded 3,400, with an almost equal number in the pipeline.

This unique financing resource includes several valuable features.

The chief advantage of 203(k) is that it allows the borrower to combine the acquisition and rehab costs of an older home in the first mortgage.

Eligible homes include one- to four-family dwellings at least one year old needing a minimum of $5,000 in repairs.

Eligible users include owner-occupants (for purchase or refinance), investors acquiring and rehabbing for rental, developers (nonprofit, for-profit, or public agencies) buying for resale or rental, and anyone interested in buying and restoring HUD-foreclosed properties.

No income limitations apply.

Up-front cash requirements are low. Closing costs can be wrapped into the mortgage; the downpayment is 3 percent of the first $25,000 and 5 percent of the balance.

Restoration costs are induded in the first mortgage amount and are escrowed at closing. You deal with one lender and incur closing costs only once.

Virtually any repairs qualify except such luxury items as swimming pools and spas.

Conversions from multi-unit to single-family occupancy, or the reverse, are eligible.

Up to six months of mortgage payments can be included in the mortgage if the house cannot be occupied during construction.

The maximum mortgage amount is the lesser of the purchase price plus estimated costs of rehab or 110 percent of the expected market value of the rehabbed property plus allowable closing costs.

Borrowers who can document their construction skills may do some of the work themselves.


Larry and Jean Sener of Baltimore, Md., are in the process of purchasing their first home in the Sudbrook Park Historic District, a post-World War II brick colonial in a former summer-home resort designed in 1889 by Frederick Law Olmstead.

The Seners are working with First National Bank Mortgage Company, where they first completed a loan application interview and then received a prequalification determination for a loan up to a specific dollar amount. Not all mortgage companies offer 203(k) loans, and in the past this has been a major stumbling block. Since the recent streamlining of the program and the decision by Fannie Mae and Freddie Mac to buy 203(k) mortgages, however, the number of participating mortgage companies has increased.

The next step was to contact a HUD 203(k)-certified private home inspection service to inspect the property and develop plans, specifications, and cost estimates. The inspector`s job is to make sure that, upon completion, the house meets minimum housing code standards and local building code standards for replacement.

The Seners` scope of work has been approved by First National Mortgage, and the lender will soon send an FHA appraiser to do an "as is" and a "post-rehab" appraisal. Based on a satisfactory appraisal, the final loan amount will be determined and the Seners` prequalification will become a formal commitment. At loan closing, First National will escrow the construction funds and disburse them based on a prearranged draw schedule. The Seners will have 30 days to start work and up to six months to finish. Since Larry is a professional cabinetmaker, the lender will allow him to complete some improvements himself.


Jean Sener offers these tips for anyone interested in using 203(k).

Processing time, including three meetings with the home inspection consultant, will probably take about 90 days.

Make sure your contractor can wait at least two weeks to receive progress payments from the mortgage company. All work must be inspected and approved.

Housing and building codes may conflict with historic preservation standards and personal preferences. You may want to enlist the support of your local preservation commission to assure that you have a voice in the discussion speaking up for the retention of your house`s character-defining elements.

The 203(k) insurance program`s only clear drawback is the interest rate. Although it is a 30-year fixed rate loan, lenders are asking about 1.5 percent more than market rate to help defray the higher administrative costs. If mortgage rates are already high, this additional cost may be prohibitive for some buyers. Overall, 203(k) is well worth considering as a preservation tool, and a good example of how HUD and historic preservation can work together.

Publication Date: July/August 1995

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Author(s):John Leith-Tetrault

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