THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Saturday, April 15, 1995 TAG: 9504130310
SECTION: REAL ESTATE WEEKLY PAGE: 04 EDITION: FINAL
TYPE: Cover Story
SOURCE: BY MARY ELLEN MILES, SPECIAL TO REAL ESTATE WEEKLY
LENGTH: Long : 125 lines
With the shortage of new construction locally, the secret is out among some regarding a combination construction and permanent loan. The FHA 203k Rehabilitation Loan has existed for 30 years, but it has just become in vogue within the last five years or so.
It was established by the U.S. Department of Housing and Urban Development to revitalize urban neighborhoods, but people are also fixing up farmhouses and dwellings in historic districts, says Terrie Suit, branch manager at Mid-Atlantic Financial Group in Virginia Beach.
A growing number of investors are buying and rehabing older houses and houses in need of repair with this loan, then renting or selling the properties. Another factor is that the loan process has been simplified.
People no longer have to ``muddle through the system,'' says Suit, ``with no real help from the lender. Now we can put them on an automatic sidewalk, with everything being rolled into this one loan.''
In the past, says Suit, if you wanted to buy a house that needed renovations, ``you probably couldn't get a loan because the house wasn't in lendable condition. You also couldn't do any repairs on the house, because you didn't own it.
``And, if you did do repairs on a house that someone else owned,'' she says, ``and the deal fell through, you'd be out of the money. It was a Catch 22. Unless you could get owner financing, it was difficult to buy the house and get the work done, and then refinance both with another loan, paying a lot of loan fees along the way.''
With the 203k, she says, ``people can go in, have the money to acquire the property, have the support to figure out what to do to the property, close the loan and automatically the money comes to do the work to fix up the property, and end up with a 30-year fixed mortgage rate or an adjustable rate mortgage for owner-occupants.''
For investors, the cost is only 15 percent down, perhaps half of what other loans might cost. Then, if a first-time home buyer wishes to assume the loan, he can do so with no down payment. For owner-occupied homes, the down payment is only 3 to 5 percent. The buyer may also include the projected rental income when applying for the loan.
``HUD has really done everything it can to help people go in and fix up these neighborhoods,'' says Suit.
Another feature of the loan process, says Walter Thompson, loan officer and 203k specialist with Mid-Atlantic, is that up to six months worth of mortgage payments on the old home may be financed with the new loan during rehabilitation. Once the house is finished and the buyer has occupied it, regular payments resume.
From 1991 to 1994, Mid-Atlantic was the No. 1 203k lender in Virginia. The lender sends speakers on the subject to civic leagues, churches, realty offices, and other organizations.
``We want this program to succeed. We want to see the cities in this region be revitalized through this,'' says Suit. ``Even non-profit organizations, which have been in business for at least two years, can use this loan to buy homes.''
Most lenders base the maximum loan amount on the current appraised value of the property. However, the 203k loan bases the amount on the appraised value of the house after renovation. There is only one closing and the finance rate is either a low fixed one or adjustable, available for owner-occupants).
The loan can be used only for residential property of up to four units. The minimum renovation cost is $5,000, and the loan amount cannot exceed the FHA limit for this market area, which is $123,700 for a single-family unit, up to $194,350 for a four-family unit.
The loan is primarily a renovation loan, but once the requirements are met for the first $5,000 in ``necessary structural repairs/additions,'' (including such items as termite or water damage, regrading, modernizing, handicapped access, etc.), the money can be used for ``customer preferences'' (such as appliances, carpet changes, etc.).
The only items which are excluded are ``luxury items,'' such as tennis courts, hot tubs, satellite dishes, etc. The borrower may even move a house from one location to another.
Rick Schaefer, partner in MSRV Development, a real estate investment company, has used ``The K'' loan hundreds of times, starting about four years ago, mostly through the Directors Mortgage Loan Corp.
The company buys residential properties, rehabilitates them, then leases them. Schaefer says that the loan provides ``an opportunity to revitalize neighborhoods that might otherwise be depressed; people are put to work; property is rehabilitated, giving people nice places to live.''
``It puts homes that weren't on the tax roll back on it, therefore helping the city; and it increases the value of both the homes and the neighborhoods. An entire neighborhood can be cleaned up, benefiting the entire community.''
Schaefer says the 203K loan process can be more time-consuming and more costly (with points) than the average loan. However, it requires less down payment, and ``the nice thing about it is, you can utilize the program in any neighborhood or city. . . . It's a great program, very versatile.''
Rodney Herrman of Norfolk, who owns, Creative Finishes, an interior finishing business, was alerted to the 203K loan by a real estate agent when he was house hunting.
He bought a 40-year-old, three-bedroom, two-bath tri-level house in the Larrymore Lawns subdivision of Norfolk. He lives in the dwelling while he fixes it up.
``The thing I like about it is that if you're the least bit handy with repairs, you can really do well for yourself,'' Herrmann says.
Jay Dolan of Virginia Beach used the 203k loan to buy a three-bedroom, 2 1/2-bathroom house in the Red Wing section of Virginia Beach. He says the loan ``worked out better than I thought.'' He owns a painting and construction business and was able to act as his own general contractor and complete about 70 percent of the repairs himself. The rehab was completed in three weeks.
``It was nice to see the transformation,'' he says. He was pleased that the little amount of out-of-pocket expense was returned to him in ``such a short amount of time that it was inconsequential.''
``The thing I liked about the loan is that it allowed me to do all the necessary things with little of my own cash. I was able to do a little more to make the house right, and include the cost in the mortgage, and I'll reap the benefits when the house is sold.''
``It's a very complicated program that can be made easy,'' Suit says. ILLUSTRATION: Color photo on cover by Lawrence Jackson, Staff
Rodney Hermann
Staff photo by MORT FRYMAN
Terri Suit and Walter Thompson process rehab loans at Mid-Atlantic
Financial Group.
Staff photo by LAWRENCE JACKSON
Rodney Herrmann's kitchen is just about ready. He bought his house
and fixed it up with a 203k loan and did most of the work himself.
by CNB