When interest rates are high and mortgage applications are down, MLOs should look at out-of-the-box solutions for homebuyers and homeowners.  One possible solution has been around since the 70’s.

In 1978 the Federal Housing Administration (FHA) created a new lending program 203(k) as part of the National Housing Act Amendments. This program was established to address the need for financing solutions for the rehabilitation and renovation of older, distressed, or rundown properties.  Since its inception, the program has been updated and refined to better serve homebuyers and homeowners interested in property rehabilitation.
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Though the FHA 203(k) program hasn’t been used much in the last several decades, with interest rates high and housing inventory down, this program may see renewed life.  Since this program differs from traditional lending, understanding the FHA 203(k) and creating an effective strategy could provide a new avenue for MLO’s.  Here is a short overview of the program and how to make it a lending strategy.

Building a successful 203(k) lending program requires teamwork.  Assembling a good team of professionals could be the most important element to a profitable 203(k) program. Here’s a short list of possible specialists you’d want on your team.

• HUD-Approved 203(k) Consultant: For Standard 203(k) loans, it's a requirement to work with a HUD-approved 203(k) consultant. This consultant assesses the property, helps create a detailed work plan and cost estimate, ensures the project complies with FHA guidelines, and oversees the renovation process. Their expertise is invaluable in ensuring the success of the renovation project.
• Real Estate Agent: If purchasing a property with the FHA 203(k) program, working with a real estate agent experienced in 203(k) transactions can be helpful. They can help identify properties eligible for the program and negotiate favorable terms.
• Contractor: Hiring a qualified and experienced contractor is crucial for the success of the renovation project. The contractor should be familiar with the FHA 203(k) program's requirements and have a track record of completing similar projects on time and within budget.
• Real Estate Attorney: A real estate attorney can review contracts, ensure legal compliance, and protect borrower interests throughout the purchase or renovation process.
• Home Inspector: A home inspector can help identify potential issues with the property before committing to the purchase. Their findings can be used to form renovation plans and budget.
• Energy Efficiency Consultant: If the plan is to make energy-efficient upgrades as part of the renovation, consider an energy efficiency specialist who can help maximize energy savings and potentially qualify for additional incentives.
• Interior Designer or Architect: If there are specific design or layout goals through the renovation, an interior designer or architect can help create a plan that aligns with the vision while adhering to FHA 203(k) guidelines.

​Homeowners and home buyers interested in renovation of their property are less dependent on lower interest rates and will consider a higher rate for the ability to renovate a purchase home or their current home.  As a successful MLO, adjusting to market conditions is important.  Looking for alternative lending programs to build your market, even as interest rates are high, can be the difference between growing your business or stagnating.  This little used, 45-year-old program may be one of those alternative programs to help you build a market.

Many homebuyers are uncertain if buying a home with a 7% interest rate is a prudent financial decision.  That's understandable considering just a couple years ago mortgage interest rates were around 3%.  Let's see if at 7%, might it still be a good decision.
Let's compare two financing options for the purchase of a $550,000 home, with a 7% interest rate over 30 years.  Let's also say the buyer has a car loan of $43,000 with a monthly payment of $831 and a credit card with a $10,000 balance at a 21% rate and pays 2% of the balance each month.  We are not looking at any additional financial factors other than the financing option that is best, and could it improve the buyer's long-term financial outlook?

Option 1:  A Larger Down Payment with Existing Debts
In the first scenario, the buyer makes a down payment of $110,000 (20% of the home price) and a mortgage of $440,000.  In this option, the buyer retains a car loan of $43,000 and a credit card balance of $10,000 at an interest rate of 21%, paying 2% of the balance monthly, (where if they continue this payment schedule, it will take 42 years to pay off).

Option 2:  A Larger Mortgage with Debt Payoff
The second option, the homebuyer has a smaller down payment of $55,000 (10% of the home price), resulting in a mortgage balance of $495,000 and uses $53,000 to pay off the car loan and the credit card.  With this option there is mortgage insurance cost of 0.7% of the balance annually but would end after 8.35 years.

What's the Decision?
Here's a summarized comparison without considering future investment opportunities:
Option 1:  Better if immediate mortgage payment is a major concern.  However, long-term interest costs on credit card debt can be significant.
Option 2:  More appealing from a total cost perspective as it pays off the high-interest debts.  This may reduce the risk and long-term expenses of credit card debt.

Conclusion:
High mortgage rates scare off many potential homebuyers, although looking at their overall financial condition from different perspectives, both options have some merit.  Homebuyers often don't consider the true cost of shorter-term debt and the overall cost of variable rate debt, like credit cards.  As a good mortgage loan originator, part of our job is to illustrate how home buying can not only provide the benefits of homeownership, but many times can also provide an opportunity to restructure debt.  This in turn benefits the homebuyer even if the current mortgage rate is higher than they would like.