Federal Housing Administration (FHA)

FHA lending program allows investors to tap into run-down homes (The Real Deal)
The Real Deal
(1/18/2013 9:00 AM, Hiten Samtani)
A federally backed lending program may help buyers tap into run-down homes for a quick return on investment, the New York Times reported.

The Federal Housing Administration's 203(k) program allows buyers to incorporate the cost of necessary repairs into their mortgage, on both single-family homes and multi-family homes with up to four units. The loan — which requires a low down-payment of 3.5 percent — covers purchase and repair costs and is determined using the property's post-restoration value. Originations of 203(k) loans have increased to more than 25,000 in 2012, up from 3,400 in 2007.

This opens the door for investors to quickly turn around a home for a profit, experts say.

"When people are buying the houses correctly, they're actually generating instant equity," said Jeff Onofrio, the director of renovation lending at AnnieMac Home Mortgage in Mount Laurel, N.J.

"The properties that are going to give the instant equity are the bank-owned houses with no heat or a failing roof, and those shortcomings are accounted for in the sales price," said Matt Perillie, a loan specialist at Campbell Mortgage in North Haven, Conn.

The 203(k) program was begun in 1978, but gained popularity after the foreclosure crisis that began in the early 2000s. In the fiscal year that ended Sept.30, 2012, the FHA endorsed 22,500 loans, as compared to 3,400 in the 2007 fiscal year.

To be sure, the loans are more expensive than conventional financing due to higher interest rates. Investors are also required to live in the property. But Onofrio told the Times that borrowers would often use the loan to buy and renovate a multi-family property, live there briefly and then refinance the property using a conventional loan.