FHA changing 203(k) rehab mortgage rules in Opportunity Zones to spur investment

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Aiming to boost investment in residential real estate into Opportunity Zones, the Department of Housing and Urban Development announced late last week that it is increasing the amount of money borrowers can roll into a Federal Housing Administration loan to pay for rehabilitating their home.

HUD announced Friday that it is expanding its Limited 203(k) Rehabilitation Mortgage Insurance Program, which allows homebuyers and homeowners to finance rehabilitation costs of as much as $35,000 into their mortgage to repair, improve, or upgrade their home.

But the FHA is changing those rules to bring more money into Opportunity Zones. According to HUD, beginning Dec. 16, 2019, borrowers in Opportunity Zones will be able to finance up to $50,000 in rehab costs through an FHA loan.

Created by the Tax Cut and Jobs Act of 2017, Opportunity Zones seek to spark economic development in distressed areas by encouraging long-term investments through significant tax breaks. The tax incentive allows investors to defer or minimize taxes on capital gains and, when the investment remains in play for more than a decade, eliminate capital gains taxes altogether.

Much of the focus on Opportunity Zone investment has been on commercial or multifamily real estate, but a recent study by ATTOM Data Solutions showed that 80% of Opportunity Zones were found to have median home prices that were below the national figure of $266,000.

Meanwhile, half had median home prices that were less than $150,000. Now, borrowers can finance as much as $50,000 to rehab homes in those areas.

According to HUD, the FHA has active insurance on more than 623,000 mortgages for eligible homes located in Opportunity Zones, which represents 8% of FHA-insured mortgages nationwide. As is often the case with these types of announcements, there are a couple of catches.

First, the incentive will be limited to the first 15,000 mortgages in Qualified Opportunity Zones each calendar year.

Second, the Limited 203(k) program may only be used for “minor remodeling and nonstructural repairs,” such as “connecting to public water and sewage systems, repairing or replacing plumbing, heating, air conditioning or electrical systems, and covering lead-based paint stabilization costs.”

The move is the latest in a series of efforts by the government to attract investors to Opportunity Zones. Thus far, confusion has held some investors back from taking advantage of the program, despite noted interest in the possibilities it could offer.

“Providing this opportunity means that the families seeking affordable homeownership or to improve their homes in distressed neighborhoods – where rehabilitation is needed the most – have a path to financing that makes it realistic to do the repairs and improvements that will uplift the entire community,” said HUD Secretary Ben Carson.

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