When Sarah Coleman and Carl Sack first saw “Big Blue,” they knew they were home. The massive house, so named because all the rooms were painted shades of the color, was built in the 1920s on two and a half lots in the Corey-Merrill neighborhood of inner-city Denver.
But their Realtor, PJ Magin, remembers the 4,200-square-foot place was a gut job – the roof was shot, the hardwood floors wrecked, a detached garage needed scraping, and an old “octopus” boiler appeared to have been recently coal-fired by the foreclosed-upon owners because the house had no power.
The bank initially listed the place at $789,000, and the couple put in an offer of $245,000 in winter 2011. Their first lender backed out one day before closing, and the bank gave the couple a small window to resuscitate the deal when Magin recommended working with mortgage lender Brett Popish. Because Coleman and Sack had done the heavy lifting for the previous lender, including getting bids, Popish was able to fund and close in two weeks.
The 203K loan product Popish used funded $163,000 of conventional improvements like a new roof, historically right-on windows to replace the 60 single-pane original ones, and rewiring the house. More importantly, the loan also funded “green” upgrades like a high-efficiency furnace and sealed ductwork, tankless, “on-demand” hot water heating and ENERGY STAR appliances. And Popish, who’s a 203K veteran at Universal Lending Corporation, says homeowners are more and more choosing the loan for green upgrades to existing homes in both purchases and refis.
The beauty of the 203K is that it’s agnostic about what’s green and what’s conventional. Viewed through the 203K lens, granite countertops are weighted the same as high-efficiency furnaces as new carpet as low-VOC paint as structural repairs as solar panels (owned, not leased). The mortgage underwriter can fund up to 110 percent on the “as-completed value” of the purchase price ($245,000 in the case of Coleman and Sacks) plus the improvements ($163,000) up to the conforming loan limit ($408,000 in the City and County of Denver in June 2011).
The 203K is essentially a construction loan and a purchase loan rolled into one, and the FHA, its guarantor, estimates they’re two percent of the entire FHA portfolio. The loan comes in two flavors – a streamlined loan up to $35,000 in non-structural repairs, and a full up to a county’s conforming loan limit. Coleman and Sack opted for the latter, given the massive overhaul that the house required.
The loan also solves a couple of problems that existing “energy-efficiency mortgages” (EEMs) have. EEMs require a HERS rating, a “miles-per-gallon” metric assigned to a home, and those start at $500 and go up depending on square footage. The math behind a HERS rating generates the net present value of future energy savings based on a prescribed scope of work. Vary outside of that complex calculus, and you’re on your own.
Secondly, the 203K is a less-complicated product to use as long as everyone’s on board from the gitgo, says Mike Wilcox, Renovation Sales Manager at Academy Mortagage, which specializes in the loan. He only recommends using 203K-seasoned contractors, and he has a “come-to-Jesus” meeting before closing to insure buy-in.
“This is not a program to guess at,” he says, noting that its legendary complications usually come when contractors aren’t schooled in the draw process. “The most important thing for everybody to know is who to call – from the contractor to the lender to the FHA consultant.”
The loan product gets a bad rap among real estate professionals because it has the reputation of financing houses that are in shambles. Not so, says Popish.
“With a 203K, you can do something as small as an appliance package, just putting new appliances in a home,” he says. (Energy-efficient, please!) “Or buying a home, scraping it and building a new home on the foundation.” The numbers simply have to pencil out – green or not.
“I don’t know why every loan isn’t a 203K,” Wilcox says. Even simple jobs like repainting and recarpeting can be rolled into the price, adds Popish. The work simply has to be bid beforehand and weighed in the appraisal value.
Popish says 203Ks are also popular with experienced lenders because the properties go into default significantly less than homes financed with other loans. “Anyone fixing up their home to make it a dream home, they’re far less likely to default,” he says. (Which begs the question – Are “green” borrowers better credit risks? Let’s start watching for data to support that.)
Coleman says she and Sack don’t consider themselves hardcore enviros. She’s an accountant, and he’s a financial analyst so both live decidedly in the realm of the left-brained. “The greenest thing I did was buy this house and not scrape it,” she says.
Still, they chose high-efficiency systems, reused building materials when possible and have put a herculean amount of sweat equity into Big Blue, including a lot of repainting. “We aren’t consciously buying something green, but we make important decisions whenever we can.” The 203K helped them get there.
For more information ...
The Web site www.203Kcontractors.com provides a spot to source good contractors familiar with the 203K process.