Looking to buy his first home, Umar Moulta-Ali turned to Baltimore's Station North neighborhood on his brother's recommendation and saw an opportunity in vacant rowhouses there.
After purchasing a city-owned shell property, Moulta-Ali searched for financing to overhaul the 3,000-square-foot row- house and found an increasingly popular option: the Federal Housing Administration's Section 203(k) program.
The loan wraps renovation costs into a single mortgage requiring only a 3.5 percent down payment, simplifying the rehab and purchase process for homebuyers.
"The longer I've been here, the more I've grown to love the city. This particular neighborhood ... there's a political will for people to move in and do these renovations and live there," said Moulta-Ali, who along with his mother, was expected to close on the house last week and begin renovations soon. "In any other situation, I couldn't custom-build the home exactly the way I want it without the 203(k)."
With a growing number of foreclosed and bank-owned properties in need of repairs or modernization, the use of the loan is increasing nationwide. While the process can require a lot of paperwork and patience, homeowners say it's worth the effort.
"There's a tremendous increase in the demand for the 203(k) loans as a result of the distressed properties that are selling right now," said Michael Crook, a renovation specialist at Wells Fargo in Lutherville. "We're finding Realtors out there seeking information about the 203(k) loans and looking to get their borrowers pre-qualified because of what they're finding in the market: REO [real estate-owned properties] and short-sells. They require some sort of repairs, and sellers are not willing to do that."
The number of 203(k) loans in Maryland has risen from 324 during the fiscal year that ended Sept. 30, 2005, to 651 as of Sept. 30, 2009, according to figures from the Department of Housing and Urban Development.
In Baltimore, however, the number of 203(k) loans dipped to 160 from 197 during that period - though there was an increase from fiscal year 2008 to 2009, according to HUD.
In Baltimore County, there were 104 rehab loans during fiscal 2009, up from 36 the previous fiscal year.
Though there were fewer 203(k) loans in Anne Arundel, Carroll, Harford and Howard, each county saw a steady increase in such transactions during the past five years.
Crook said most people getting 203(k) loans are first-time buyers taking advantage of declining home prices and the federal $8,000 tax credit.
Anna Custer, executive director of Live Baltimore Home Center, said the 203(k) program is getting more attention now because of the number of fixer-uppers flooding the Baltimore market. Custer notes that about 20 percent of Baltimore home sales in September, or 87 of 431, were for under $50,000, which means that many properties would likely require repairs.
"With the pressure on the mortgage market in the last couple of years and a strong desire to do renovations because of the affordability, the 203(k) has gotten a lot more recognition," said Custer, whose nonprofit offers quarterly homeownership classes, including one on renovations.
For properties needing minor repairs, homebuyers can turn to the 203(k) streamlined program that allows them to add up to $35,000 in renovation costs to their mortgage.
For many homebuyers, the standard 203(k) loan makes the most sense. HUD says there is no maximum on the loan amount, which depends on the value of the property after renovations are completed.
The standard program requires an HUD-approved consultant to oversee renovations from beginning to end, making sure health and safety issues are addressed first.
A consultant also can help buyers determine estimated costs of repairs. Lisa Marra, a certified renovation specialist at Wells Fargo, calls HUD consultants the consumer's ally.
"What they are tasked to perform is not only identify the scope of the work and what needs to be done to meet minimum property standards and review with the borrower the desired list of improvements, but they help identify the costs of the work," Marra said.
Another important thing to consider is picking a contractor. In Maryland, a homeowner can use any contractor as long as the person has a Maryland Home Improvement contracting license, Crook said.
The extent of renovations can range from minor upgrades to a complete rebuild of the house, Crook said. For instance, one client is buying a foreclosed property, and the estimated cost for repairs is $13,000 to upgrade windows and replace carpeting.
Moulta-Ali, who will take on a $313,000 loan through Wells Fargo, will start on an extensive rehab of his fire-damaged home that had been abandoned for several years. The renovations are expected to take six months, Moulta-Ali said.
The work involves installing energy- efficient features as well as preserving the historical features of the 1900s rowhouse to take advantage of tax credits.
When the work is complete, the home will have four bedrooms, 3 1/2 bathrooms and a finished basement.
Moulta-Ali said he's glad he chose Baltimore over Washington, where he initially sought to buy a house.
"The bang you get for your buck," he said. "There is no way I could afford a 3,000-square-foot home in the D.C. area."
To find out more
For more information on 203(k) loans and finding HUD-approved lenders, check out www.hud.gov/improvements