"The 203K really helped us out," he said. "We could make the house like we wanted it." When Brian and Traci Montpas bought their bank-owned house in Flushing last spring, it had been vacant more thana year. Flooring and copper plumbing had been stolen; the drywall was punched full of holes, and animal feces soaked the subfloors. but the money to repair this mess -- $68,000 over the cost of the house -- was not a problem for them. It was built right into the home loan -- a 203K mortgage."We bought the house and property dirt cheap," said Brian Montpas -- just $124,000 for a 15-year-old house of almost 3,000 square feet, along with five acres, a pole barn and a pool."The 203K really helped us out," he said. "We could make the house like we wanted it."
It's a story gaining ground in Michigan and other recession-hit states. As economic recovery stirs, the 203K mortgage -- a Federal Housing Administration loan that is backed by the Housing and Urban Development Department -- is emerging as a good way to restore run-down, foreclosed houses. Buyers get a bargain; empty houses get owners, and neighborhoods get a boost.
"We embrace the program. We just think it makes sense," said Tim Ross, president of Royal-Oak based Ross Mortgage, the largest 203K lender in Michigan, a HUD report said. "There are so many winners."
The numbers are relatively small, but the increase in loans demonstrates the slowly improving market and a solution to a major problem in metro Detroit's housing market -- the tight supply of move-in-ready homes that has kept sales subdued and even resulted in some bidding wars.
In the past six months, HUD numbers show, the number of 203K loans in Michigan grew by 18% over the same time period the year before, or from 560 to 661 loans.
Rehab Costs Rolled In
How do the loans work? In a single mortgage, a 203K lends the buyer enough money to buy the house plus enough money to fix it. The sum is paid back as a single mortgage, typically over 30 years, with interest close to a standard mortgage rate.
This is a standard FHA mortgage, which means the minimum down payment is 3.5%. Only homeowners can use it, not investors. Only licensed contractors can do the work.
The 203K has been around for more than 30 years, but its reputation for extra rules, inspections and paper work resulted in lenders and Realtors often not pushing it.
Now, facing Michigan's ample supply of run-down, bargain houses for sale, would-be buyers should know a couple ways to utilize a 203K.
First, choose a lender well-versed in 203Ks, who is familiar with the flow of forms and inspections and can ease you through it.
Second, for a smaller project, consider a newer version called Streamline 203K, which trims some red tape for repairs that cost less than $35,000.
"The Streamline has been around a few years. Now it's gaining in popularity because it really makes renovation easier for the folks looking to do cosmetic changes, rather than structural changes," said Stacy Brazier, Wells Fargo's Michigan sales manager. Nationally, Wells Fargo handles the most 203Ks.
Streamlined Process
In St. Clair Shores, brothers Michael Reardon and Jon Reardon relax in the upstairs studio -- used as an entertainment area -- of the house they bought with a Streamline 203K.
Michael, a mechanical engineering graduate with a new job, and Jon, now near graduation from Oakland University, went house-hunting 15 months ago. Their real estate agent took them to a 1,800-square-foot, four-bedroom, two-bath ranch with a large second-floor addition.
"As soon as we saw this one, we decided to go with it," Michael Reardon said.
One of the attractions was the backyard, or lack thereof. The previous owner had bricked over the whole backyard for a patio.
"I'm a young guy," said Michael Reardon, 27. "I don't want to spend my time mowing."
The brothers' house was not a foreclosure, but it needed work. The Streamline 203K paid for a new furnace, central air-conditioning, windows, wood floors and carpets. In this case, the work crews were poised to jump in, so only a week or so passed between the loan closing and the Reardons moving in -- uncharacteristic speed for any home improvement project, including those financed by 203Ks.
It was done by Detroit Build, a design/construction firm based in Royal Oak, which has completed about 300 projects for 203K clients over the past three years. The company is on a list compiled by Ross Mortgage for clients.
Besides professional licenses, contractors on this list must have a good reputation, Tim Ross said, and be so financially stable that the delays that come with a 203K won't faze them. At various steps, each job must be inspected by a HUD-approved inspector before any pay is released.
"We can't have a contractor who is unable to carry the project," Ross said.
The delays and paper work could be daunting for an unprepared contractor, said Detroit Build's owner, Seabrook Satterlund. "Sometimes the stack of paper work is 4 inches tall, and, with the draw schedule, you don't get paid up front."
Nevertheless, Satterlund beats the drum for the 203K, giving seminars to real estate agents and mortgage brokers around the state.
"More people should realize that these loans exist," he said, "that they can buy a house cheaply and roll the costs into their mortgage, and turn it into the house of their dreams."
More Details: Steps to a 203K home mortgage
- Find an FHA-approved lender who is experienced in 203K loans and determine what size mortgage is best for you.
- Choose a house that needs work with a sale price low enough to allow repairs.
- Determine the required improvements. If they cost more than $35,000, you need to work with an FHA-approved inspector. Repairs like painting, roofing or remodeling a kitchen can be paid for with a 203K loan. Luxury items like a pool cannot. Choose a licensed contractor.
- Working with your lender, get an appraisal of the house's future value after improvements. The lender can use this figure to make the loan, even though it's higher than the current sale price.
- Take possession of the house at the standard loan closing. Your lender will set up an escrow account with the rehab money. Your contractor will get a money advance so work can be started. The escrow fund will pay out the rest of the funds as you go through a series of repairs and inspections.
- Federally backed 203K home mortgage covers repair costs of fixer-upper homes
By Judy Rose, Detroit Free Press Special Writer
