Glennda Howe stood where her kitchen used to be. Everything was gone - the cabinets, appliances, table, chairs, antique hutch. This 11-by-14-foot room, which for 21 years had been the hub of Howe's life, was undergoing a metamorphosis. In a few weeks, this would become her dining room. Her new kitchen would be part of an 800-square-foot addition.
"I still can't believe it," said Howe, 51, of the changes coming to her West Chester ranch. "I look at this, I still can't decide what I am more excited about - the kitchen, the dining room, the fireplace or the laundry room ..."
But she and husband Don, 57, have other reasons to grin. The Howes financed their addition with a little-known renovation loan that requires a 3.5 percent down payment. Their interest rate is 4.25 percent over 30 years. And, once the project is finished, they will have instant equity. That's because, unlike other kinds of loans, the loan amount is based on the home's appraisal after the renovations are finished.
It's called a 203K loan, a 30-year-old FHA-insured product created strictly for renovations. Borrowers can bundle this loan with the mortgage when they purchase a house. Or, a 203K can be used the way the Howes did, for renovations on a home they already own.
You wouldn't think the loan has been around three decades, based on how many banks offer it. But interest is growing rapidly as the number of loans granted has nearly tripled in the last five years, from more than 3,600 in 2007, to nearly 13,000 as of July of this year, according to federal figures.
Jocelyn Predovich, founder of Limetree Lending Group out of Denver, calls it the "best kept secret in the industry."
The advantages: Borrowers can use the money for something as simple as buying and applying paint. Credit scores can be in the mid-600s as long as the borrower is employed. Also, 99 percent of the time, it doesn't matter what condition the house is in - the loan's approved. Did you read that, flippers?
And, 203Ks can spread the love: It sometimes raises neighbors' home values, too.
Its disadvantages: Tick, tock. If borrowers are planning a significant renovation, like the Howes', they need to find a Type A builder who respects the calendar; the project must be finished within six months. This is a federal government product, so you'll have red tape. Builders need to be approved, as do plans, as do budgets. Because it's an FHA loan, the borrower will pay mortgage insurance.
Also, the builder has to spend his or her own cash before the lender provides reimbursement, which is guaranteed. The Howes' contractor, Lee Rollman of Rollman Building & Contracting in West Goshen, doesn't usually accept large start-up checks anyway, so he was fine with the way the 203K reimburses. But the builder you choose needs to be financially sound, he said.
"For some contractors who don't want to fund it, it's bound to be a problem."
The Howes were well-educated about the process because the staff at Mount Laurel-based lender AnnieMac steered the couple and the Howes' builder through the process.
But not many lenders - and real estate agents - can. It's not easy to find on the Internet. Type in keywords 203K and the names of five Philadelphia-area banks, and your search will come up empty.
"This is a program where few experts exist," Predovich said. "Many companies still don't offer this program, and the ones that do only offer it as a shiny object to recruit with. They are not investing in training or knowledge."
She knows of cases where brokers have told customers the program no longer exists. Sometimes, banks may unwittingly steer customers in the wrong direction.
When the housing market started to crash in 2008, Wells Fargo - which had offered the product for years - began training staff in earnest. The reason: The number of lender-owned properties was growing.
"We knew this product could be a huge opportunity," said Jeff Philibin, Wells Fargo's renovation branch manager in Johnstown's regional office.
Today, he said, Wells Fargo does about one-third of the 203K loans written nationally. But, Philibin insists, there's still room for more training.
"We have to create more specialists," he said.
Bank of America, which reintroduced the 203k loan in 2009, has since seen interest in the program nearly triple.
"We know the product is extremely useful in today's market with more distressed properties and older housing stock in need of updating," said Andrew Leff, Realtor and builder relationship manager at Bank of America, "but our biggest challenge, and opportunity, is buyer and Realtor awareness."
John Boberick, 49, and his fiancee wanted to put a four-bedroom addition onto a house in Marlton to accommodate their combined families after they marry. Like the Howes, Boberick scoured the Internet to see what products existed to finance the addition. He found the 203K, but turned to a large, nationwide bank - he declined to say which one - for service.
The bank, he said, didn't tell the couple about the time restrictions, or that the builder was responsible for paying for the work up-front. "They threw the documents at us," Boberick said. "They couldn't even tell us what the mortgage [amount] was."
After months of frustration, a sympathetic underwriter led the couple to a builder well-versed in the ways of the 203K, and the builder led them to AnnieMac. It took about a month. As for the interest rate, the bank wanted 4.25 percent; AnnieMac, 3.75. The addition and wedding are on schedule.
"It comes down to setting the correct expectation," said Jeff Onofrio, the director of renovation lending for AnnieMac who worked with the Bobericks. "It's definitely not for everyone out there. For someone who wants instant equity, who wants to reap benefits," it's perfect.
Boberick's builder was certified in a program started three years ago by Paul Weldon, a real estate agent in Phoenix who discovered the loan when a client found a house that needed lots of work but couldn't afford a construction loan - which generally are more expensive than 203Ks - on top of a mortgage.
Weldon said he started the online program because he was struggling to find contractors to take on 203K projects. So far, 213 contractors nationwide have been certified and another 18 are going through the program, he said. None is certified in Pennsylvania.
Advocates of the program say it's the loan of our times, considering its ability to raise housing prices, or comparables, of nearby homes because of the instant equity.
In the meantime, homeowners are reaping the benefits:
Glennda Howe said it took her and Rollman 10 minutes to design her new kitchen: hickory floors, sage-colored maple cabinets, sand-colored walls, gold-colored granite tops. The powder room, the first of the renovations to be finished, isn't allowed to be used by anyone but her.
She said the paperwork part of the loan process was painful because the application demanded personal details - they wanted to look at the source of inherited money - but the discomfort has been replaced with utter glee.
"I can't wait to live in it."