Renovating Chicago’s Southside – One Home at a Time with FHA 203k & Fannie Mae HomeStyle Renovation Loans

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I have been writing my renovation blog, “Rehab Dollars & Sense” for 5 years now. Today I wanted to take time to focus on Chicago’s Southside and relate what I have seen rehabbers experience there and how renovation loans have been used by Buyers to rehab properties.

Being from Chicago and specializing in residential renovation financing for years I have had an opportunity to see the good these loans can do across the area. By that I mean renovating a property on a given block that had been vacant, foreclosed, trashed and perhaps a magnet for crime, can make a positive difference. That difference is in lighting up, in cleaning up, in restoring a derelict property so families can occupy it again which may improve even an otherwise unappealing block. The benefits of renovation can be that families have a newly rehabbed, fully functional, modern property to live in that is safe, secure, sanitary and sound.

I feel gratified and privileged to be able to be of help in restoring properties on Chicago’s Southside by educating Buyers, Realtors, owners and stake holders in the community about the potential a renovation mortgage product offers to improve the community. Buyers may not be aware of mortgages that provide funds needed to rehab a property, all in the same 30 year term loan. These mortgages are available at the beginning, when a property is purchased, allowing all the funds needed for renovation to be there from the start. In many cases these are the only mortgages available to purchase an otherwise ruined property that cannot be lived in due to dangerous conditions or lack of water, electricity, etc.

One of the reasons why a renovation loan can be a powerful financial tool in most any community is the renovation mortgage is always based on what the “after renovated value” of the property will be rather than its current value. Almost any 1 to 4 unit property is eligible to be purchased with a renovation loan regardless of present condition. I have seen buildings purchased that were stripped of all plumbing, all wiring, all heating, missing windows, etc. Or properties purchased that were very old and outdated needing modern amenities like dishwashers, laundry rooms, updated wiring, open floor plans and almost anything else as long as it adds value to a property. These are the homes renovation loans are waiting for and the key to making them work is to add value in a renovation.

Another reason an FHA 203k renovation loan can be a powerful financial tool for Buyers and of assistance to communities is that HUD, who oversees the FHA 203k program, will allow a property to be rehabbed and mortgaged to 110% of its value. Being able to mortgage to 110% of “after renovated value” means properties needing substantial rehab can get it now and be returned to functional use as homes for families quickly even though the local values have not yet caught up to costs of reconstruction. This little known aspect of FHA 203k loans can be beneficial to communities emerging from a period of blight and for Buyers purchasing in any community.

There is oversight by the lender to help Buyers plan an appropriate renovation budget the area will support and not overspend or over improve. A local licensed Appraiser will determine the “after renovated value” by comparing against other properties that have been updated in the general area after seeing a renovation description with all planned costs. All of this occurs prior to a renovation loan approval and closing which protects the Buyer from a situation that may not be financially workable.

The two main renovation loans used are FHA 203k & HomeStyle* Conventional. A third, newer renovation loan is called VA Renovation for Veterans and Active Duty military. FHA and VA are for those who will own and occupy property themselves. HomeStyle* Conventional is also for those Investors seeking to buy and rehab a property then rent it to tenants without living in the property themselves.

The cost can be expressed as a dollar amount in monthly payment for each one thousand dollars borrowed in a 30 year term mortgage. As I write this the cost for each one thousand dollars borrowed on a 30 year mortgage is about $5 a month. That means for example, if adding $20,000 for updates or repairs on a purchase mortgage, the extra cost is about $100 more in monthly payment. Or adding $100,000 to a purchase mortgage can add about $500 a month to the payment to fund rehab now.

I have seen clients buy trashed multi-unit buildings for $70,000 or $80,000 and then add $200,000 or $300,000 to fully restore them this way. As long as the “after renovated value” will support the size mortgage needed, the loan can usually be approved.

As an example, a Buyer purchases a 4 unit property to rehab for say $70,000 using an FHA 203k renovation loan and adds $300,000 to fully rebuild the interior. Each apartment will have new wiring, separate heat and AC, new bathrooms, new kitchens, new floors, new windows, new doors and exterior repairs like roof or back porch. The 203K loan calculates down payment based on total of purchase price and renovation dollars and can be as little as 3.50%. In this example that 3.50% is based on sum of $70,000 purchase price and $300,000 total renovation budget or $370,000. The down payment is then $12,950. This down payment and the mortgage fully finances an entire renovation in effect. The mortgage size is $357,050. The monthly mortgage principal & interest payment may be about $1855 (Based on interest rate of 4.75% and APR 6.13%). If living in one apartment and renting the other 3 it may be possible for the buyer to have the mortgage payment, plus property taxes, home insurance and mortgage insurance to be fully paid each month by the 3 tenant rents. All this would be determined prior to closing based on an Appraisal Report showing both “after renovated value” and projected future “after renovated rents”. Ideally in this example the Appraisal report would show an “after renovated value” about $370,000 or more.

To protect Buyers against unforeseen cost overruns or other added expenses uncovered during the rehab process there is automatically a 10% to 20% “emergency reserve” added to all renovation loan types. The reserve is calculated off a base rehab budget and protects a home Buyer who may not have cash funds to cover unexpected surprises encountered during rehab. It is part of the rehab loan and if never used subtracted from the loan upon completion.

A Buyer can also add up to 6 months of full house payment funds into the rehab loan, so the payments are made automatically during reconstruction while the building is still vacant and cannot be occupied or produce rental income. The Buyer may have housing costs to pay elsewhere so this option relieves financial pressure of double housing cost during renovation that might have prohibited moving forward.

I offer as much guidance and experience as I can when I speak to Buyers about their potential purchases of a given property in a given neighborhood. Part of the reason I write my renovation blog is to spread the word to Buyers, Sellers, owners and others these loans exist and can be helpful in restoring a block or neighborhood one home at a time.

In Chicago there is a wide variety of neighborhoods, some 77 differently named areas within the city limits. Ideal properties to buy and rehab can be any old, outdated, ruined or unappealing 1 to 4 unit buildings and can be found in any of these 77 neighborhoods. Many times, I have had clients buy a home at less cost on an estate sale where the house is technically still functional as it is, but today’s Buyers may pass on it due to obsolescence. Or a property may have been vacant, abandoned, foreclosed on years ago and decaying. Yet it is a solid building just needing an interior rebuild to be functional again. Any of these situations can be appropriate for any of the renovation loan types in any neighborhood.

In recent years I have seen an influx of Buyers seeking value and willing to undertake a renovation project on Chicago’s Southside because they have found a solid building, often a brick 2 to 4 unit, near transportation hubs, cultural amenities, etc. that will show an increased “after renovated value” with strong rental income.

Below is a list of properties I have helped clients finance the purchase and renovation of on Chicago’s Southside by neighborhood and property type. Sometimes all it takes is one house to be improved upon to encourage someone else to do the next house and on and on.

  • Chicago Lawn – an area near Midway Airport with many older but solid properties to rehab
      • Client purchased a 1920’s 4 unit building needing modern updates like new kitchens, some new windows, etc. with an FHA 203k renovation loan. Buyer and family occupy one apartment and receive rents from 3 others to help pay the full monthly mortgage payment.
  • Englewood – a neighborhood in the news but rarely for Buyers renovating a property with many late 19th century and early 20th properties in need of rehab
      • Investor client purchased a dilapidated single family home over 120 years old with nothing left inside and used a HomeStyle Conventional renovation loan to rebuild it, cure numerous building code violations and rescue it from a city demolition order. It’s now a fully functional 4 bedroom, 3 bath, 21 St century residence for a family to occupy.

      • Client purchasing a 4 unit apartment building over 130 years old needing limited updates with an FHA 203k loan. Buyer will live in one apartment and receive rent from 3 others to help pay the full monthly mortgage payment.
  • Garfield Ridgea neighborhood on the southwest edge of Chicago with many early 20th century homes in need of updating
      • A first time buyer client bought an early 20th century single family home in need of repairs with an FHA 203k to update HVAC, remodel a kitchen and other misc. repairs.
  • Grand Boulevardth  century and early 20th century properties needing rehab
      • Client purchased a late 19th century 3 unit apartment building using an FHA 203k needing a full gut rehab to become a modern structure with separate HVAC, new baths, new kitchens, new electric, new water lines, etc. Buyer will live in one apartment and receive rent from 2 others to help pay the full monthly mortgage payment.
  • Greater Grand Crossing – a neighborhood offering many 1920’s era 2 unit buildings known as “2 flats” needing rehab
      • Client purchased a 2 unit building with an FHA 203k providing funds to remodel kitchens, baths, update electrical service, repair roof, add separate HVAC for each apartment, etc. Buyer lives in one apartment and receives rent from the other to help pay the full mortgage payment each month.
      • Client purchased a 3 unit building with an FHA 203k needing new windows, electrical and plumbing repairs, etc.   Buyer lives there and receives rents from 2 other apartments to help pay the full mortgage payment monthly.

 

  • Jackson Park Highlands – a 1905 historic designated community near Lake Michigan in the South Shore area south of the Jackson Park golf course with many larger homes needing updates
      • Client purchased a foreclosed, early 20th century 6 bedroom single family home with a HomeStyle Conventional renovation loan to remodel 4 baths, rebuild the kitchen and repair plumbing, electrical, etc. Buyer lives there with family today enjoying the historic, large home and location.
  • Marquette Park – an area with many traditional Chicago Bungalows and small apartment buildings from the early 20th century in need of rehab
      • Client purchased a 2 unit building from the early 20th century as a foreclosure using FHA 203k to do a gut rehab for all new plumbing, electric, kitchens, baths, etc. Buyer lives there and collects rent from the other apartment to help pay the full mortgage payment monthly.
      • Client purchased a mid 20th century 2 unit apartment building as a foreclosure using an FHA 203k to update the kitchens, baths and do misc. basement repairs. Buyer lives there and collects rent from the other apartment to help pay the full mortgage payment monthly.
  • McKinley Park – an area with older late 19th century and early 20th century single family and multi unit apartment buildings southwest of downtown
      • Clients purchased a 2 unit apartment building with little left to salvage using a HomeStyle Conventional renovation loan to gut rehab and convert it to a single family home with all new mechanical systems, a new 4 bedroom floor plan including a finished basement for 3 levels of living.
  • Woodlawn – a neighborhood near the University of Chicago with many late 19th century and early 20th century single family and multi unit buildings in need of rehab
      • Client purchased a 3 unit apartment building known locally as a “Greystone” for their limestone facades on an estate sale using an FHA 203k loan.   The Buyer undertook a complete gut renovation with all new mechanical systems, a totally new floor plan and lives in one apartment while collecting rent from the other 2 to help pay the full monthly mortgage payment.

As you may be able to see I am passionate about helping Buyers and owners use all the renovation loan types to restore not only properties but perhaps help neighborhoods in the process. It is just a matter of spreading the word these loans exist and educating Realtors, Buyers and neighborhood stake holders like Aldermen and others about the possibility for renewal renovation loans offer.

I hope this article has been helpful and encouraging to those who may have thought purchasing a home to renovate was too complex or beyond their ability to afford or manage. I’m always happy to answer questions.

 

Perry Farella      773 793 8803   or   773 248 8422   perry.farella@primelending.com 

Down payment and terms shown are for informational purposes only and are not intended as an advertisement or commitment to lend. Please contact us for an exact quote and for more information on fees and terms. All loans subject to credit approval. Rates and fees subject to change. Not all borrowers will qualify. * HomeStyle® is a registered trademark of Fannie Mae.

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