Home equity loan meltdown is the rebirth of the 203k loan.

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I was reading an article the other day that said that there are 347 billion dollars in home equity loans in the U.S. that are underwater.    That number again is in the billions not the millions.  Four years ago if you didn’t use a California real estate loan package that included a first mortgage and second mortgage combination to obtain your home, you were able to obtain a HELOC for at least $25,000 to $50,000 as long as you had decent credit scores.  Lenders would lend up to 100% and beyond the value of the property.  The HELOC and second mortgage market may possibly be on the verge of a meltdown.

Now with the all the foreclosures the past few years, many second mortgage and home equity lines of credit lenders are losing their entire balance once the foreclosure sells due to the fact that there’s not enough equity in the property to payoff all outstanding loans on the property.

This is where the 203k loan comes into play.  The applicant(s) looking to buy a home have an option of getting up to $35,000 to fix minor cosmetic repairs on a property they are looking to buy.  The repairs would be done after the loan closes, so if there’s a property with minor damage and the seller can’t or won’t fix it, lenders won’t lend on it if it’s a health and safety issue but a 203k loan lender will.  Missing toilets, broken windows, a broken HVAC and missing cabinets are a few things that will spook a lender, the 203k loan can remedy these issues.

The 203k loan that I’m referring to is the 203k streamline.  It is an FHA loan so it also requires a minimum of a 3.5% downpayment and a minimum 620 credit score.  With the 203k streamline you receive half of the monies between 7-10 days after the loan funds to pay for materials among other things for your projects and the other half of the funds are paid out after all work is finished.

The 203k streamline is like having a built in home equity loan but you get the funds faster albeit it has a $35,000 maximum.  These funds are included with your purchase loan so you also able to secure the loan that you used to buy the house plus the additional $35k into one single fixed rate loan.

A 203k loan can also be used on a refinance loan for existing homeowners.  Many people do not know this, but today if you try to get a cash out refinance loan, you have to have at least 20-30% equity before a bank will lend and the same goes for a 2nd mortgage or HELOC.  The 203k loan on a refinance can go over 95% loan to value however keep in mind all cash out funds are for minor home improvements.  Lenders have their own additional guideline overlays on the 203k loan refinance but it is definately worth looking into if you are short on equity and are in need of some minor home repairs.

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Best KW

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3 Comments

  1. Kevin Walton
    Posted March 11, 2011 at 9:09 pm | Permalink

    A minor repair is a pretty broad term. As long as you’re not doing a room addition, moving a load bearing wall, or doing something that involves drawing up of plans, it can be considered as minor. So anything from a new air conditioning system, a new roof, or kitchen cabinets etc… is considered a minor repair.

  2. Posted July 11, 2011 at 7:29 pm | Permalink

    It’s not really an answer to foreclosure because the applicant must still be able to qualify for the loan plus the balance of the loan is going up (for the repairs to the property) and isn’t given directly to the borrower.

  3. Posted October 18, 2011 at 5:25 am | Permalink

    This a good idea for refinance and for house improvements.

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