Financing a fixer-upper
Larraine Corpuz is buying a home -- something she wasn't sure she would ever be able to do -- thanks to a Federal Housing Administration loan program that has been around since the 1960s, but is just now gaining popularity with individuals instead of just nonprofits and housing authorities.
The 203(k) Remodel and Renovation Loan Program allows people, with only 3.5 percent down, to buy distressed properties that no other lender would finance and then incorporate into the loan the necessary funds to make either major or minor repairs to the home.
Corpuz has purchased a dilapidated 1,500-square-foot Cape Cod home in Morton Grove that was built in 1939 and has been sitting empty, deteriorating, for more than two years.
Neighbors were complaining to the village because the gutters were hanging off and plants were growing in them, Corpuz said. In addition, the windows were old, the boiler was no longer warming the house because the water lines weren't working, there was no air conditioning and the electrical service was not up to code.
"But the structure of the home was sound. I had two inspectors look at it," she said. "And the location is prime, two blocks from a school, surrounded by mini-mansions and close to shopping. Lots of people would have been discouraged, but I saw the potential in the house."
So after a five-month period of red tape, the 35-year-old Peapod purchasing agent and first-time homebuyer was able to purchase the foreclosed home from Freddie Mac for $110,000. A 203(k) consultant estimated that necessary renovations to the home, along with upgrades Corpuz wanted to make the house comfortable for her family, would cost another $73,000. A 15 percent contingency for unexpected repair expenses is routinely added in, so through the program Corpuz was able to obtain a $207,000 loan to buy and renovate the home.
Without this FHA program, she said, the home would have continued to bring down neighborhood property values or possibly would have been torn down and replaced by a mini-mansion.
"The only choices for anyone wanting to buy a house like this are to pay cash, which I couldn't afford to do, or to go with a 203(k) loan, because no other lender will lend money to buy a home that is uninhabitable," Corpuz said.
"It is great that I had this option because otherwise, I could never have bought a house in this kind of neighborhood," she added, explaining that she is buying the house for her aging father and stepmother to live in, along with her sister's family, which is losing their home to foreclosure. Corpuz herself will continue to rent an apartment in Chicago's Lincoln Village neighborhood.
"If this works out well, I may do it again sometime for myself, but my sister's need is more immediate than mine and my father isn't getting any younger," she said. "If my sister and her family ever decide to move out, maybe I will move in."
And Corpuz is making the house family-friendly by tearing it down to the studs; rearranging the interior to make it more open; and putting in an updated kitchen and two new baths and adding a high-efficiency forced-air furnace and air conditioning.
It was her real estate agent who told Corpuz about the program and referred her to a lender that specializes in such loans. The lender then gave her a list of five approved general contractors from which to choose and she signed a contract with Scott Allbright of Rolling Meadows-based Green Day Construction.
Allbright has been in construction for 20 years, but Green Day is a new company, devoted to home remodeling with a green touch and to handling 203(k) loan renovations that save deteriorating homes.
"There are only so many investors with cash who are willing to buy these kinds of properties and renovate them. Through the 203(k) program, regular people who need to borrow money to buy a house can buy these bargains, customize them the way they want them and get them off the books for the banks," Allbright said.
Bank of America, for instance, is advertising the availability of 203(k) loans because after they lose money on a foreclosure, banks feel this is a way to recapture the loan with a new homeowner and make back some of that loss, Allbright said.
"This is a great way to get rid of the glut of foreclosed inventory and to put contractors back to work," he added.
But there is lots of paperwork involved in getting a 203(k) loan and making the renovations, Allbright cautioned. So every professional involved, from the Realtor, to the lender, to the contractor, must be experienced with the program and willing to dig in and do the necessary bidding and reporting.
"The contractor must have someone on staff who knows how to write the very detailed bids FHA wants, including linear feet on trim, square footage on cabinets and flooring, etc. We have a special software program. And in order to hold down the price for the buyer, approved contractors are only allowed to charge a certain amount for the work," he said.
"You also have to find a contractor with the financial backing to front a lot of work," Allbright said, "because FHA only allows a draw after an appraiser agrees that the work is 50 percent complete and again, when it is totally complete. But the good part for the contractor is that the money is escrowed so you know you will get paid when the work is done."
FHA also demands the work be completed in six months or less, which is great for the buyer.
In the case of Corpuz, Allbright said her home should be ready for occupancy in May and he was able to assist her with many ideas for maximizing the space in her home because he has renovated literally hundreds of homes like this over the years.
Jen Ortman, manager of the Prudential American Heritage realty office in Barrington, is also experienced with these rehabilitation loans.
"They are great because they allow people to buy these extremely distressed homes, which need so much work. You simply can't buy them with a regular FHA loan," Ortman said.
Only certain lenders offer 203(k) loans and only certain contractors are allowed to do the work, so the challenge for the real estate agent is to assemble a list of approved lenders and contractors so they can be shared with interested prospective buyers.
"When the market was strong, people didn't show much interest in these loans. But now that money is tighter, these are becoming popular," Ortman said.
"The FHA 203(k) loan program is the Department of Housing and Urban Development's primary program for the rehabilitation and repair of single family properties," according to the FHA website. "(It is) basically a home improvement loan. As such, it is an important tool for community and neighborhood revitalization and for expanding homeownership opportunities. Since these are the primary goals of HUD, the department believes that the FHA 203(k) loan is an important program and they intend to continue to strongly support the program and the lenders that participate in it."
There are two versions of the program: the full 203(k) program, which will finance up to $410,000 including the cost of the house and needed renovations, and the 203(k) streamline version will finance repairs of $35,000 or less. These are perfect for homes that only need nonstructural repairs like new windows or appliances or cosmetic changes, Allbright said.
Just about any home will qualify for these loans, he added, and a prospective buyer must be able to withstand the usual due diligence for a loan, including having a credit score of at least 620 and the necessary cash for a 3.5 percent down payment. The loans are generally 30-year fixed rate mortgages for which market price or just above market price is charged.
For more information and a list of area 203(k) lenders, contact Green Day Construction at (847) 254-9797 or logon to www.greendaynow.com.