The house had no heat, no hot water and rotting cabinets in the kitchen. The basement leaked and cracks lined the walls. Most buyers saw a money pit, but John and Kelli Evianiak snapped up the "handyman special," expecting it would make them a tidy sum.
For two months, Mr. Evianiak, 24, worked evenings and weekends fixing up the brick Cape Cod in Fullerton. Last week, he and his 23-year-old wife and their two children moved into a house with a dry basement, solid walls and a $16,000 jump in value.
Like a growing number of homebuyers in metropolitan Baltimore, the Evianiaks had stumbled upon a federally insured mortgage program that allowed them to buy and renovate a home for little cash down and gain instant equity. The Federal Housing Administration program, known as 203(k), had languished for years but has soared in popularity since the Department of Housing and Urban Development streamlined it earlier this year.
Renovating a handyman special has proved an attractive option for first-time buyers who can't afford full-price property or those with little cash for down payments or major repairs. Buyers with construction skills or unconventional design ideas relish a chance to customize a home. And others like the idea of rolling the purchase and renovations into a single loan as a way to save on closing costs, lenders said.
Many of the homes on the market in need of repairs have been foreclosed upon or become rundown from years of neglect. Others have been repossessed by HUD.
Such was the case with the Evianiaks' home, which they bought RTC for $95,000. They spent $7,200 on repairs -- installing sheet rock and a heating system, fixing electric and plumbing systems, ripping up worn carpeting, waterproofing the basement, replacing the kitchen floor.
Mr. Evianiak, a professional remodeler, did some of the work and hired contractors for major jobs. The mortgage came to $103,850, including purchase, repairs, inspection fees and a contingency reserve for unanticipated repairs. When work is completed, HUD inspectors say the appraised value will rise to $111,000.
The Evianiaks were attracted by the immediate profit margin they wouldn't have seen had they bought a house in good condition in the $103,000 range.
"Not only can you buy a house, you can fix it up the way you like it," Mr. Evianiak said. "You can buy a house for much better than market rate, put some money into it and have instant equity. There were a lot of other houses we checked out. But we were going by the profit margin."
Borrowers should know they will pay higher interest rates on 203 (k) loans, on average about 1 percent more than rates on conventional loans, said Bud Carter, FHA director of single-family housing development.
Though the 203(k) program has been available for two decades, most lenders shied away because of complicated paperwork and high administrative costs, he said.
"There wasn't much of an effort by HUD to train lenders in how to use it," Mr. Carter said. "Lenders were reluctant to make a big investment. A lot of borrowers didn't know it was available and neither did real estate brokers."
In March, HUD simplified the program, reducing the number of appraisals and plans required, liberalizing restrictions on mixed-use properties and expanding the types of eligible repairs. Lenders turned to the program as a way to meet federal requirements to increase lending in inner-city neighborhoods. Some lenders can now close a 203(k) loan in 30 to 45 days.
Mr. Carter said the number of 203(k) loans nationwide insured by FHA has jumped from several hundred a year to an all-time high of 3,742 in fiscal 1994, with Baltimore's 272 loans surpassed only by that of Albany, N.Y., and Richmond, Va.
Another boost for the program is expected when Countrywide Funding, the nation's largest mortgage originator, begins offering it next month.
"The program is taking off like a rocket, becoming our niche product," said Patricia Griisser-Robinson, branch manager of Performance Mortgage Co., in Lutherville. "Realtors are now able to sell those handyman specials that have been on the market that never had a financing tool.
"We've seen houses gutted down to a shell in Bolton Hill completely renovated with new floors, heat, plumbing, electrical systems and new thermal windows," she said. Performance Mortgage processes about a dozen loans a month, most in Baltimore and Baltimore and Harford counties, with purchase prices generally ranging between $20,000 and $50,000 and repairs sometimes equaling purchase price, Ms. Griisser-Robinson said.
At Prosperity Mortgage, a subsidiary of Long & Foster Real Estate Inc., Greg Gering began working exclusively with the 203 (k) program last year when it began accounting for a bigger share of his loans. The number per month jumped from two to three to about 10, he said.
"I've just been swamped," said Mr. Gering, now the firm's FHA 203(k) specialist.
A typical loan for one of his customers for about $77,000 would cover a $50,000 purchase and $20,000 in repairs for a home ultimately appraised for $90,000 to $95,000, Mr. Gering said. But one customer bought a house for $98,000 and made $50,000 worth of repairs, using a $147,000 loan. The completed home was appraised for $188,000.
Loans to buy and repair single-family homes cannot exceed $151,700, and at least $5,000 must be used for repairs. Down payments can be as low as 1.5 percent. Buyers present a set of plans to a lender and an FHA inspector determines whether they meet county or city codes. Once the borrower gets estimates for repairs over $1,000, the lender calculates the maximum mortgage.
Buyers also can finance a portion of the closing costs, up to six months of the mortgage payment, and in the case of a HUD repossessed property, taxes and points.