Dear Mr. Azrael:
I bought a house last October using an FHA 203(k) loan. The items that were on the 203(k) list were done. My problem is that I am finding repairs that were not disclosed to me that are major and need to be done immediately. I cannot find anyone that will help me find the right person responsible for the mess in this house. I have recently found out that the FHA 203(k) loans are all in Philadelphia and now you cannot get through.
I want to know: What does it mean when I am told that Maryland has a disclaimer and/or disclosure law? Is it true that if the house inspector puts a note at the bottom of his report that he could not move personal materials nor could he see through walls, he cannot be responsible for stuff he cannot see? Is it true that an FHA loan is federally backed and someone has to be responsible?
What happens if I declare bankruptcy?
Can I have the FHA reappraise the value of the house so I can afford to do the repairs? After Hurricane Floyd went through, I learned that my 2-year-old roof leaks.
Lillie Becker, Dundalk
Dear Ms. Becker:
The Federal Housing Administration's 203(k) program provides government guarantees on loans to rehabilitate and repair one-to-four family properties. The Section 203(k) program allows borrowers to get just one long-term mortgage loan to finance both the acquisition and rehabilitation of the property. When the loan is closed, the portion of the proceeds for repairs is placed on a rehabilitation escrow account. The escrow fund is then disbursed as the repair work progresses.
The rehabilitation work must include a minimum of $5,000 of major alterations, upgrades and replacements. To qualify for an FHA Section 203(k) loan, the borrower must supply a "before" and "after" appraisal of the property's value.
A write-up and cost estimate also must be furnished. Usually, the borrower hires an FHA-approved consultant, architect, engineer or home inspection service to inspect the property, write up the items for rehabilitation and prepare a cost estimate.
"Neither the FHA nor the lender is responsible if the 203(k) loan doesn't include necessary repairs, or if the work is done improperly," says Edward Rich, president of Source Financial Inc. in Baltimore. Rich, whose company specializes in arranging FHA-insured loans, warns homebuyers that when defects are found it often is a case of "buyer beware."
Homes eligible for Section 203(k) rehab usually are sold "as is."
"The seller usually disclaims all warrantees," Rich said. So, it is up to the buyer to make sure the cost estimate for rehabilitation is sufficient to take care of all problems. The homebuyer also selects the contractor. If work is not done properly, the homebuyer must look to the contractor to correct the defects -- not the FHA or the lender.
Ms. Becker, in your case, I would carefully review the cost estimate prepared by your consultant. If the cost estimate negligently omitted necessary repairs, you may have a claim against the company or person who prepared it. Another possibility is to see if any defect -- such as the leaky roof -- is covered by a guarantee.
You may also talk to an FHA lender to see if it makes sense to get a new Section 203(k) loan to provide funds for additional repairs. A reappraisal may allow you to borrow more money.
What happens if you default on a Section 203(k) loan? The lender has the same rights as apply to any FHA-insured loan, including the right to sell your home at foreclosure. You can talk to your lender about a payment deferral, but you still will be responsible for the entire debt, plus interest.
As for bankruptcy, you should consult an attorney to see what the impact of a bankruptcy would be on your financial situation.