The 203K FHA loan is a program that is designed to include the purchase and renovation financing all into one loan. The major benefit of this is that you will not need to get a second mortgage, home equity loan, or other solution to have the money needed for repairs.
Let’s face it. With all of the residential properties that are either in foreclosure or listed as a short sale, many of these properties will require some kind of repairs to the property. The major benefit for you is that you can still consider purchasing some of these properties that are great deals with FHA 203K financing customized to the needs of you and the property.
FHA 203K Rehab Loan Features
One of the biggest features of the FHA 203K renovation loan is the fact that you are able to borrow against the value of the home after repairs. This makes getting the appraised value easier since it is not based on the current condition of the property.
The 203K loan also follows FHA guidelines which are a little more lenient for most borrowers.
- This loan cannot be used for new construction homes. It requires that the property be at least one year old in order to be eligible.
- The work to be done on the property must also be completed by a licensed contractor. Because of the requirements of the loan, it must be done by someone that is qualified and licensed to do the work. This is actually good news as it means that you do not have to be a “handyman or woman” in order to use this type of financing.
- FHA loans are also geared towards people that will be occupying the property so this type of FHA loan cannot be used by investors.
- All property types are eligible with the exception of condos, log homes and manufactured homes. This means that you have a large amount of flexibility in the type of property you choose for your new home.
- In order to conform to the loan guidelines, the work must begin 30 days after closing and must be complete within six months of the closing date.
- As the work is completed on the property, inspections must be done to ensure that the work was completed satisfactorily. That means that there will be a lot of involvement in the loan between the lender and the borrower. For this reason, you really need to have a FHA 203K lender that is experienced in handling these types of loans.
FHA 203K Loans for home renovation financing fall under 1 of 2 categories, they are either a 203(k) Streamlined loan or a 203(k) standard loan. Both of these FHA products are great loans that allow borrowers to purchase or refinance a property and include the cost of renovations, or additions as a part of the mortgage.
- The mortgage amount is based on the PROJECTED value of the property after the work has been completed
- The borrower makes payments based off the full mortgage amount including escrows after the loan closes
- If the borrower is unable to occupy the property due to the type of work that needs to be completed, he or she can roll up to 5 mortgage payments into the mortgage.
FHA 203(K) Streamlined Loan
Let’s start with discussing the 203(k) streamlined loan. This is a great product to make some small improvements on your home without having to deplete your savings.
- They are limited to a total of $35,000 in hard and soft cost
- These renovations do not allow for structural repairs
- There is not a minimum dollar amount for the streamlined product, but the repairs are limited to repairing, replacing and updating items in your home. So you would not use a General contractor for a streamlined, but rather someone like a roofing contractor, or a carpet contractor.
What are the eligible repairs under 203(K)?
- Roofs, gutters and downspouts
- Existing HVAC systems
- Pluming and electrical systems
- Exterior deck, patio, porches
- Septic system and or well
- Basement waterproofing, window and door replacement
- Kitchens and bathrooms that DO NOT require structural repairs
- Accessibility improvements for persons with disabilities
- Purchase and installation or appliances
- Lead-based paint stabilization or abatement of lead-based paint hazards
This is a great opportunity to take care of all those things you were meaning to do but just don’t have the extra cash to do.
The Standard FHA 203k product (over $35k in repair work)
- Loans with more than $35,000 in repairs would be under the Standard umbrella
- Property repairs that require structural improvements
- Standard 203(k) require a General Contractor & Consultant
- Usually plans that require coordination of work, drawings, or blueprints
- A consultant would prepare a detailed work write-up for the appraiser to use to determine the after improved value
So to make a decision on which loan is right for you it is important to have an understanding of what you want to improve about your property. Is it cosmetic? Is it structural? How much will it cost?
So how is the FHA 203(K) loan amount determined?
The lesser of the 2 below, meaning FHA will use the lesser value of
Sales price PLUS total renovation costs OR 110% of As-Completed Appraised Value
You must have a 620 credit score, some banks will look at very strong compensating factors down to 580, but don’t get your hopes up.
203K Contingency Reserve
For Standard 203(k) a Contingency Reserve is set up to protect the borrower from any unforeseen problems that may come up from items that could not be seen when the initial plans were put together.
For example- additional repairs or replacement of plumbing or electrical items that could be hidden under a floor or behind a wall.
So how is this reserve calculated?
- 10% of repair costs: Utilities are turned on when property is inspected
- 15% of repair costs: Utilities are turned off when the property is inspected
- 20% if the underwriter feels it is necessary
FHA Streamline do not require this contingency but may be requested for by the underwriter under certain circumstances.
How is this reserve funded?
- Option 1- It can be financed into the loan, any un-used funds must be applied to the principle and not refunded to the borrower
- Option 2- The borrower can fund it, and this way any un-used funds may be refunded to the borrower