Originally published in The New York Times
By LISA PREVOST
Published: October 31, 2013
The Federal Housing Administration’s 203(k) loan program covers purchase and renovation costs in a single mortgage. Although eligibility requirements rule out renovations that change a home’s foundation, the government announced in September that it was temporarily lifting that prohibition for homes in areas devastated by Sandy’s severe flooding.
This means that homes requiring elevation to reduce flood risk may now qualify for 203(k) renovation loans. The rule change, which expires in March 2015, applies only to primary homes, and to properties whose foundations lie below new flood elevation standards. Also, after repairs, the elevated foundation must comply with Federal Emergency Management Agency requirements and local building codes.
“This may not be the solution for everyone,” said Steven Marshall, the national director of renovation financing at the Real Estate Mortgage Network, a lender based in Edison, N.J., “but it certainly offers hope to people who were previously shut out. There are borrowers who wanted to rebuild but couldn’t, based on the new building codes for elevating their homes, because they had no means.”
Elevating a property is expensive, but in the highest-risk flood zones, called “V zones,” it can substantially reduce annual premiums for flood insurance.
The 203(k) program allows a borrower to buy or refinance a damaged property and roll the estimated cost of repairs into the mortgage (instead of obtaining a separate construction loan). The down-payment requirement is just 3.5 percent, and the total loan amount is based on the property’s appraised value after improvements. Private mortgage insurance is required.
Financing through lenders approved by the Department of Housing and Urban Development is available for single-family homes and multifamilies of up to four units.
Still, if the rule change will help some borrowers in federally designated disaster areas, it is by no means a panacea. Tom Smith, a broker associate with Re/Max at Barnegat Bay, in Manahawkin, N.J., says that while agents there are certainly making buyers aware of the 203(k) option, many damaged properties are ineligible because they are or will be used as vacation homes.
And because the program is restricted to renovations, as opposed to demolition and construction, it will not help in areas with older homes that aren’t worth salvaging.
In Little Egg Harbor, N.J., for instance, it’s not very cost-effective to raise up the small, ’60s-era bungalows lining the Mystic Island waterfront, said Richard Kitrick, a lawyer and township resident. The homes took in three feet of water during the storm and require significant repair, but are also so outdated that spending another $60,000 or so to elevate them off their slabs doesn’t make sense, he said.
“You’d be trying to salvage a structure that really should have been demolished.”
Mr. Kitrick believes the 203(k) loan makes sense for borrowers who aren’t demolishing a property and don’t qualify for lower-interest loans available to Sandy victims through the Small Business Administration. But right now, he said, the people with the least access to financing for reconstruction are owners of second homes — and the 203(k) program is still closed to them. “If F.H.A. really wanted to take a bold step and do something that’s going to help us reconstruct homes,” Mr. Kitrick said, “it would be to open that program up to secondary-home buyers.”