Month: March 2014

With the beginning of the competitive spring buying season, you may be interested in buying a fixer-upper. If so, the FHA 203K rehab mortgage is something to consider.

The 203K program allows you to purchase a home and obtain the money to make improvements to it in one mortgage. While it is a more involved process than taking out a traditional mortgage, you can borrow money against a property with a low value in its unimproved state and improve it to increase its value.

Repairs that can be made using 203K money include furnaces, water heaters, carpeting, and roofs, among others.

How it works: The first step is to find a mortgage lender who can process 203K loans. It’s common practice with most lenders to handle these loans; however, some don’t. Be sure your lender offers 203K products.

Then you need to find a fixer property you’re interested in purchasing. Once it’s been identified, you can proceed with the process of applying for the loan; you’ll be facing multiple cost estimates, and a special appraisal will be ordered to calculate the post-improvement value of the property.

A 203K consultant will also be brought into the project for your protection and that of FHA. The consultant will help manage the project from quality and timeline perspectives.

If the cost of the property plus the repairs adds up to less than the appraised value, the mortgage process will continue as it would with most other FHA mortgages. Expect it to take 30 to 45 days from start to finish.

Once you go to closing, money for the repairs goes into an escrow account. Draws are paid to the contractors in stages as the work progresses.

Be aware that there are special rules regarding the hiring of contractors; your mortgage professional can answer these and other questions you may have.

The level of disclosure that needs to be provided to borrowers on or soon after a mortgage application is higher than it has ever been.

This is for your protection, and it’s in your best interest to understand your lender’s paperwork, particularly two key documents: the Good Faith Estimate (GFE) and the Annual Percentage Rate (APR), which complies with the Truth in Lending Act (TILA).

The Good Faith Estimate

The GFE shows the estimated costs and other expenses related to the financing of a property. It’s significant, as it sets out what costs, including origination fees paid to your lender, cannot by law be increased at any point in the mortgage process. It also points out other fees that can be increased, but only up to a certain limit (“tolerance”).

At closing, the GFE estimates are checked against the actual fees you were charged for certain services. If there’s a discrepancy in your favor, or fees were charged that weren’t included on the GFE, there may be a “curing,” or a refund of fees.

Truth in Lending

Under TILA, you are entitled to know the APR of the loan. The APR is your adjusted interest rate after fees have been rolled in. In simple terms, this means that if two lenders have the same interest rate on the same mortgage, the one with the higher APR is charging higher fees.

It may sound confusing, but it pays to fully understand the paperwork.

Your mortgage professional can help decode it for you.