FHA Program Offers Financing Solution for Stock of Aging Homes
By: Carrie Bay
Seventy-one percent of single-family homes in the United States were built before 1990, according to a new industry report from RealtyTrac.
This older housing stock comes with less competition from other buyers and lower price points. Year-to-date in 2013, 60 percent of residential transactions have involved homes built prior to 1990, RealtyTrac reports.
“The high percentage of homes that are at least 20 years old and likely in need of some major repairs is eye-opening,” said Jake Adger, chief economist at RealtyTrac. “However, given the low inventory of homes available for sale in today’s market, this challenge of aging U.S. housing supply can also be an opportunity for buyers looking for a bargain and homeowners looking to update their living space and improve the value of their homes.”
Adger notes that the Federal Housing Administration’s (FHA) 203(k) program is the government’s answer for the nation’s aging housing supply. Owner-occupant buyers can take advantage of the 203(k) program to finance the purchase, rehab, and upgrade of an older home, while homeowners can take advantage of the program to roll renovation costs into a mortgage refinance.
Michael Mahon, EVP and broker at HER Realtors in Columbus, Ohio, says homeowners should consider programs to invest in modifications and repairs as the nation’s housing inventory continues to age. “The FHA 203(k) loan program is a great example of how community and housing redevelopment efforts can provide a higher rate of return on equity for homeowners,” according to Mahon.
Older homes are likely to be in need of major work. Many have not been upgraded to include the latest technologies for energy efficiency and natural disaster preparedness, or to include today’s preferred layouts and floor plans.
“Many consumers may not realize the FHA 203(k) program allows them to roll in the cost of both minor and major rehab into the purchase financing or a refinancing,” said Dennis Walsh, CEO of REBuildUSA, which connects buyers and homeowners with lenders specializing in 203(k) loans. “This means the entire layout of these older homes can be changed to fit more with modern tastes and sensibilities.”
REBuildUSA explains that at the loan closing, 203(k) funds are disbursed for the home purchase and, based on
previously submitted and accepted contractor bids, renovation funds are placed in an escrow account. These renovation funds are then paid in draws to the contractors as the work proceeds with final payments following inspection at completion, the company notes.
The actual disbursement schedule, inspections, and required paperwork are determined by the lender in conformance with FHA guidelines, though renovations must begin within 30 days of the loan closing and must be completed within the time frame established in the loan agreement with total renovation time not to exceed six months, according to REBuildUSA.
Adger adds that longtime homeowners may not be aware that they can refinance at a lower rate with a 203(k) loan even if their home needs major upgrades, as long as they are not in default and have at least 5 percent equity in the home—a threshold that has become much more attainable for homeowners across the country with the recent increases in home values.
RealtyTrac’s study found that homes sold so far this year which were built before 1990 sold at an average price of $233,221, while homes built in 1990 or later sold at an average price of $256,292—9 percent higher than pre-1990 homes.
“The lower price point on older homes is not surprising given many are in need of some rehab and are more likely to have maintenance issues,” Adger said. But, he contends the property condition presents an opportunity for buyers willing to take on older inventory because it means they “can purchase at lower price points and face less competition from institutional investors.”
Purchases of single-family homes by institutional investors—entities that have bought at least 10 properties within the last 12 months—skewed toward newer homes, with 39 percent of 2013 purchases year-to-date for homes built in 1990 or after, according to RealtyTrac. The percentage of sales to institutional investors where the home was built in 1990 or later even exceeded 50 percent in 10 states, including Nevada (73 percent), Idaho (66 percent), Arizona (61 percent), Mississippi (61 percent), and North Carolina (60 percent).
RealtyTrac says the likelihood of purchasing an older home varies by state. Homes older than 1990 made up more than 80 percent of year-to-date sales in 14 states: Louisiana, Vermont, Wisconsin, Michigan, New Mexico, Kentucky, New Jersey, New York, Rhode Island, Illinois, West Virginia, Connecticut, Massachusetts, and Pennsylvania. In contrast, older homes made up less than 40 percent of 2013 sales in Utah and Nevada.
Steve Roney, president of Prudential Utah Real Estate in Northern Utah, says Salt Lake City has a large amount of homes built prior to the 1990s that need repair work. “However, it is common for many of those homes to have already been updated or completely redone by the current owner or investor prior to the sale,” Roney said. “It’s very area-specific. We’ve seen older homes that have been completely redone rival the price-per-foot sale price of a new home in the same area.”
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