203K,
fix it up!

Isle homebuyers with
limited budgets are finding help
through the federal government's
203(k) loan program

By Jerry Tune
Star-Bulletin

FREDDY and Josie Tomas are living in a four-bedroom, two-bath home in the Napilihau community on Maui thanks to a revamped federal program that allows the purchase price and renovation work to be financed under one loan.

The Tomas family is one of a only a half-dozen families in Hawaii to take advantage of the Department of Housing and Urban Development 203(k) loan program, which is widely used on the mainland.

The basic idea works this way: Find a run-down, foreclosed property that was repossesed by the federal government, put in a sealed bid or go to an auction and bid for the home, then use the 203(k) loan program to buy the home and fix it up.

The Tomas family made a downpayment of $500, and a total cash outlay of $1,049 to get the loan.

The loan amount included $137,000 to buy the home, and $30,296 for the rehabilitation costs and reserves. Since the contractors had to rewire, and change the hot water tank, the $3,929 in reserves were used. (In cases where the reserves are not used, the money can pay down the loan.)

Closing costs were $3,204 so the total loan amount was $170,500. The couple is paying 6.5 percent interest on an adjustable rate mortgage.

The contractors, Moore Constructions of Kihei, did the work in three weeks. It involved the roof, doors, floors, cabinets, carpeting and walls.

HUD inspectors checked the work four times during construction and approved releasing payments to the contractors. The Tomas family moved into the home in October.

"Everything went smoothly," said Kara Beltran, the loan officer at North American Mortgage Co. who handled the details. "FHA loans were already my niche, so it wasn't that difficult to do the extra paperwork for the 203(k) program."

The federal government cut some of the red tape for inspections about three years ago, and that encouraged more lenders to get involved.

"I'm getting a lot of inquiries on fixer-uppers now," Beltran said.

"These are people with minimum amounts of cash (for a down payment) who have been looking at fire damaged or abandoned homes."

The Tomas family got the idea when Freddy talked to Realtor Doreen Hanada, who works out of the Kahului office of Prudential Locations.

The Napilihau home was abandoned and under HUD ownership for some time before the auction was held. About a dozen people entered the bidding but it came down to two after the price went past $120,000, Beltran said.

Freddy Tomas works as a steward at the Royal Lahaina Hyatt hotel, and Josie Tomas works as a housekeeper at the Kaanapali Alii condominium. They have two children.

At the time of the auction, they were renting a one-bedroom apartment for about $400 but considering a larger apartment.

"We figured that if we moved into a two-bedroom apartment we would be paying about $800 a month," Josie said.

As it worked out, the Tomas family is paying $1,253 a month on the mortgage but gets $450 from a cousin who uses part of the home. That brings the cost down to $800 -- or what they would have been paying in rent, she said.

"This program has great potential," said Eileen Pacheco, assistant vice president at North American Mortgage Co. in Honolulu. "We expect to do a lot of these loans."

Several lenders are pushing the idea, and similar programs -- the Fannie Mae Home Improvement Mortgage Loan and Community Home Improvement Mortgage Loan, which are conventional loan alternatives to the HUD 203(k) program.

With the average age of the nation's housing stock at 28 years, and more than 89 percent of the homes older than 15 years, the 203(k) program appears to be a natural fit to market conditions, Pacheco said.

A June 7 "Housing Fair" in Honolulu with government and industry representatives drew about 1,000 people who looked at a variety of loan programs.

"The 203(k) program definitely was one of the most popular," said Jill Hurt, HUD's single family housing division director in Hawaii.

"A lot of condominiums are now eligible for the program and it also works for homes in Honolulu because prices are lower now."

The 203(k) program also can be used for refinancing, and on Hawaiian Home Lands, she said.

On Oahu, the HUD guidelines allow for a loan up to $241,425. Home buyers must do at least $5,000 of improvements, Pacheco said.

No maximum income limits apply. Buyers only need to have sufficient income to pay the mortgage and outstanding debts, Pacheco said.

Other local lenders using the 203(k) program include All Pacific Mortgage Co., First Hawaiian Mortgage Co., Hawaii Federal Mortgage Co., Norwest Mortgage Co., Realty Mortgage Co., and Weyerhaeuser Mortgage Co.

Hurt said that about 75,000 203(k) loans have been made nationwide since the program rules were changed three years ago to make the loans easier.

The chance of getting one of the repossessed HUD homes in Hawaii is going up. During the last fiscal year, the Hawaii HUD office had a goal to sell 70 of these homes, and this year the number is 86, Hurt said.

Earlier this month HUD held an auction and accepted bids on 22 homes. But Hurt said people don't have to wait for the next auction.

"Twice a month, we have sealed bids on homes," she said.

For more information on these properties, contact a real estate agent or visit HUD's home page on the Internet at http://www.hud.gov.

The home page has other information about HUD programs. Click on "Local Offices" and then click on "Hawaii State Office." Or you can go directly to the property listings on HUD's Web site at http://www.towercom.com/hihud.