About Real Estate: Little-known federal program includes repair costs

Posted5/6/2011 12:01 AM

The Federal Housing Administration's 203(k) plan provides a single mortgage to both buy and then improve a home. It's also open to current owners who want to refinance and make repairs.


Q. We would like to buy a fixer-upper as our first home because prices in our area are so low. Trouble is, many of those properties are in awful shape, and we wouldn't have much cash to fix one up after we bought the house. We've heard that the FHA offers loans that will finance a purchase and also the repairs in a lump sum, but we don't know anything about it. Do you?

A. Sure. It's the Federal Housing Administration's 203(k) rehabilitation-loan program, which provides the money to both purchase or refinance a house and make improvements or needed repairs with a single mortgage.

The FHA's 203(k) program is gaining in popularity, in part because its loan-interest rates are relatively low and credit requirements for traditional purchase and home-improvement mortgages have tightened.

Most buyers who want to finance both their purchase and repairs in one swoop are eligible. So are millions of current homeowners who would like to refinance their existing mortgage and get some extra cash to make improvements or simply cover the cost of long-neglected maintenance issues, such as the replacement of a leaky roof or an outdated plumbing system.

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The FHA doesn't make loans directly to borrowers. It instead provides loan-repayment insurance to its network of thousands of government-certified banks across the nation, just in case a borrower under the program defaults and the bank can't recoup all of its losses through the eventual foreclosure sale.

As with any government-backed loan program, the FHA's 203(k) mortgage plan comes with some strings attached. Perhaps the key restriction is that the maximum loan amount for both the purchase (or refinance) and repairs cannot exceed $271,050 in what the agency considers "low-cost" housing markets.

The ceiling is $729,950 in higher-priced areas, which include parts of Florida, New York, Illinois, Texas and California. Hawaii, too.

You can obtain more information about the program from an FHA-approved lender, most of whom advertise in your local Yellow Pages, or by visiting the administration's website, www.fha.gov.

Q. What is a "dry" mortgage?

A. It's slang for a nonrecourse loan.

If you have a nonrecourse mortgage but fail to make the payments, the lender can foreclose on the home that you pledged as collateral but cannot take legal action to seize your other assets or garnish your wages if the foreclosure sale didn't generate enough cash to fully repay the debt. In other words, the bank couldn't "bleed you dry" to make up for the shortfall.


Q. I have a credit score that is considered average by most companies. What is the best way to improve a score for people who want to buy a house or refinance an existing mortgage at the best possible rate?

A. The most effective way to improve a credit score involves a simple two-step process. First, pay your bills when they are due. And second, keep your credit-card spending and other borrowing under control.

About two-thirds of your score is based on a combination of your payment history and the amount you owe, according to Fair Isaac Corp., the company that developed the FICO system widely used by mortgage lenders and other creditors when deciding whether to approve or reject a consumer's application.

It's easy to understand how paying your bills in a timely manner can affect your credit score: The longer you do so, the faster your score will climb. Your score will edge lower, however, if you fall behind on just one account, and then will begin a rapid downward spiral if one or more become 60 or 90 days late.

The second part of the equation -- keeping your borrowing under control to raise your score -- is a bit trickier to understand.

Most mortgage lenders don't mind relatively high credit limits on cards and the like, but instead focus on the percentage of how much of the limit is already being used. So, if you have three cards with a total of $15,000 in borrowing power but all of the cards are nearly "maxed out," your score would be a lot lower than if you owed only $2,000 or $4,000.

As a general rule, it's best to keep the balance on your cards below 25 percent of your entire credit limit if you want to boost or maintain your score and eventually get the best possible rate when you apply for a mortgage to buy a house or refinance an existing loan.

• For the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 2960, Culver City, CA 90231-2960.

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