AFTER months of searching for a mother-daughter home that they could afford in the Bergen County town where they were renting, Adrian and Rosanna Mercado came upon a Victorian with enough room for them to live upstairs and Mrs. Mercado’s parents to live on the first floor. The only problem was that the century-old house was in serious need of repairs.
A two-family in Closter, the house had sat empty for two years. It was “selling for less than it would go for if it was fixed up,” Mr. Mercado recalled, “so we thought, ‘We’ve got to jump on that.’ ”
“We figured we’d get a mortgage to buy the house, and then another loan to do the renovations.”
But they found banks reluctant to make loans on uninhabited homes — and even less eager to offer home equity loans. In fact, mortgage brokers say home equity products have all but dried up in today’s tight-fisted lending climate.
In the end it was another loan that came to the Mercados’ rescue: the Federal Housing Administration’s 203(k), also known as the F.H.A. rehab loan, which is designed to cover not only buying the home but also renovating it, and is then paid back like a regular mortgage. A hybrid that has been around for more than 30 years, the loan program has recently surged in popularity.
“We’re seeing an explosive grown in these loans,” said Ed Brehm, the branch manager of the Point Pleasant office of Prospect Mortgage, one of the country’s largest processors of 203(k) loans. The demand is being fueled by the numbers of bank-owned properties, he said, “but also from clients who can no longer get home equity loans.”
The National Association of Realtors’ January housing survey, released last month, found that 35 percent of houses on the market were either short sales or foreclosures, up from 32 percent in December and 29 percent in November. Of these, 37 percent were categorized as being “below” or “well below” average condition, sometimes resulting from the ravages of abandonment, others from damage inflicted on homes by disgruntled owners forced into foreclosure. Either way, a buyer of such a home will have trouble securing financing on something deemed less than habitable.
Enter the 203(k), an especially attractive loan for those drawn to the bargain prices but who don’t have the cash to bring the house up to habitable standards. The renovation part of the loan can be used for everything from new floors or appliances to major structural rehabilitation. Also, the loan is available for a variety of house sizes, from one-families to four-family owner-occupied units. Fannie Mae offers a similar combination lending program called HomePath.
The 203(k) is available in two structures: the Streamline K and the Consultant K. The former is for smaller, nonstructural projects that cost less than $35,000 (minus a 10 percent contingency fee that is held in reserve in the event that the project needs additional work). With these projects, the contractor doing the repairs gets paid 50 percent upfront and the remainder once the completed project has been inspected by an F.H.A. appraiser.
The Mercados opted for the Consultant K, used for projects that cost a minimum of $5,000 and have no price ceiling; they involve major rehabilitation or remodeling, or new construction (on original foundations). After taking out a $417,000 mortgage, the couple borrowed an additional $127,000 to replace a kitchen, two bathrooms, flooring, stairs, lighting, the roof and the gutters. With the Consultant K loan, an F.H.A.-approved inspector pays an initial visit to confirm the scope of the project, then revisits the site up to five times, signing off on the various stages of work and drawing down the loan to pay the contractor at each stage. Mr. Mercado said this process “was a little confusing at first, but by the third draw we got it figured out.”
For both types of loan, the contractor has six months to complete the work. Like other F.H.A. loans, the 203(k) loans require only a 3.5 percent down payment. Interest rates are about a quarter to half a percentage point higher than on traditional F.H.A. mortgages; also, these loans typically take 45 to 60 days to close, versus 30 days for conventional mortgages, Mr. Brehm said.
Because such rehab loans are more complicated and time consuming, not all lenders offer them. But those who do have found a lucrative niche. The Real Estate Mortgage Network, a mortgage company based in Edison, created a whole department around the loans, and even hired someone to serve as the company’s 203(k) concierge, according to Richard Pollock, the network’s area manager for South Jersey, Delaware, Pennsylvania and Maryland.
Ziyadah Birthwright, a senior loan consultant with Infinity Home Mortgage Company in Cherry Hill, says 50 percent of her business is now in 203(k) loans, double what it was two years ago. In fact, Ms. Birthwright, who formerly worked in home health care sales, got into the mortgage lending business after applying for one of these loans herself, in 2007, to buy and renovate a home in Mullica Hill.
“I had a not-so-great experience with my mortgage company and thought there had to be a better way,” said Ms. Birthwright, who used the 203(k) for $281,000 in mortgage costs plus $10,000 to refinish the wood floors and patch holes left behind by the previous owners. As a loan officer, she is involved with her clients and their contractors every step of the way.
After five months of rehab, the Mercados, who have been crammed in with the in-laws on the first floor, have finally moved to their own space upstairs.
“We’ve been chomping at the bit,” Mr. Mercado said. “Now it’s just a matter of seeing what things need adjusting and cleanup.”