Combination home loan

Rehab: Homebuyers may roll purchase and renovation costs into a government-backed mortgage, avoiding the need for separate loans.

May 28, 2000|By Charles Belfoure | Charles Belfoure,SPECIAL TO THE SUN

The 5-acre property was beautiful. The only problem was that the farmhouse on it wasn't fit for human habitation.

The roof needed to be replaced.

The bathroom was unusable.

The kitchen was a mess.

And no central air conditioning existed.

But Wayne Johnson loved the land. He just had to find a way to get the house in shape. What he found when he went to his lender was an all-in-one purchase-renovation mortgage offered by Fannie Mae - called HomeStyle - that allowed Johnson to buy and renovate the home in Hanover using one mortgage.

In the past, a borrower would have had to first buy the house in need of updating, then go through the process of obtaining additional financing such as a second mortgage or a home improvement loan, often at a higher interest rate and a shorter term.

With the Fannie Mae HomeStyle loan he obtained from FT Mortgage in Pasadena, he wrapped the renovation costs into one mortgage and makes just one payment a month.

"It scared the hell out of my wife when she saw the house," Johnson said. "She thought I was nuts to try to renovate it." Johnson did a complete rehab and now basically has a new house including central air conditioning.

"The purchase-rehab loan worked fantastic, I was able to do everything in one fell swoop," remarked Johnson.

With the inventory of homes for sale at its lowest point in years and much of the housing stock aging in the surrounding counties, purchase-rehab loans are an answer to frustrated home hunters who can't find the perfect property.

Thirty to 40 years ago, houses in suburbs such as Lutherville, Glen Burnie and Woodlawn were new and people flocked to buy them, but now they're old and worn.

"Even houses in Columbia are 30 years old and need work," said David Elam, vice president of Housing and Community Development for Fannie Mae in Atlanta. "With the Fannie Mae's HomeStyle mortgage, these neighborhoods are getting a second look," he explained.

"These types of loans let you look past the outdated kitchens and bathrooms," added Alan Ingraham, vice president of MNC Mortgage.

Two emerging trends brought about the need for such a loan product, according to the lenders that offer them. First, some people who don't want to commute too far are willing to consider an older home. "Individuals would rather be closer in to the city," Elam said. The housing in the suburbs along the Baltimore Beltway may have aged, but it's still a quick commute into the city.

But the main reason was the renovation phenomenon. Although the current real estate boom has produced tens of thousands of new houses, Americans still spent $170 billion on home improvement last year, Elam said. Lenders developed special loan products to take advantage of this trend.

Only half of the $170 billion was financed out of pocket, which limits what the consumer can do, Elam said.

Aside from an opportunity for lenders to capture a share of the growing renovation market, there is an additional advantage of purchase-renovation loans that benefits Baltimore and the surrounding counties. They act as a tool to stimulate redevelopment in decaying older neighborhoods deemed no longer desirable.

Baltimore County had a program using a 203(k) FHA purchase/renovation loan to target five neighborhoods. Acquire Renovate Customize a Home (ARCH), which ended in December, was part of a state housing initiative that made $40 million at 4 percent interest available.

"The program represented a new generation of Smart Growth," explained Pat Keller, director of Baltimore County's Office of Planning. The Smart Growth Act, passed in 1997, seeks to concentrate growth and improve infrastructure in existing communities in the hopes of revitalizing them.

"The houses built in the '50s, '60s, and '70s are no longer desirable housing products. So it all comes down to keeping people in these older homes," Keller said.

First, determine loan

The first thing a buyer has to establish is what the total loan amount is available. This depends on the loan. The Fannie Mae HomeStyle Standard Mortgage has a maximum of $252,700 for the Baltimore metropolitan area that gives the buyer more purchasing power in the counties.

For example, a home with a purchase price of $185,000 would be eligible for $42,430 for renovation work, which brings the total to $227,430 or 90 percent of $252,700, the maximum that may be borrowed for an owner-occupied house.

Fannie Mae requires a 10 percent down payment, with the buyer responsible for closing costs. The renovation cost cannot exceed 50 percent of the completed value.

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