Combine your First Mortgage & Renovation Costs into One Loan
The 203k Rehabilitation Loan: Combine Your Mortgage & Renovation Costs into One Loan
If you found that handy man's dream, but don't know how you'll finance the improvements the 203k home loan may be right for you.
You've found the home of your dreams. A great neighborhood, plenty space and a yard big enough for the little ones to play and best of all it's well within your price range. One problem, it's in need of fairly extensive rehabilitation. Your lender won't give lend on a home in such a sorry state.
In this market, there are tens of thousands of properties in this condition. Properties that have been destroyed by those losing their home to foreclosure, renters without the pride of ownership, the list goes on. There are should be a way for someone to take these dilapidated properties and turn them from the neighborhood eyesore to the pride of the community.
The Federal Housing Administration is here to help.
The 203k loan developed by the FHA is designed for individuals who would like to rehabilitate and repair a property allowing them to live in that property as their primary residence. By their nature, these loans carry more risk than traditional mortgages. Therefore, the federal government endorses these mortgages, encouraging lenders to underwrite 203k loans. This opens the rehabilitation property market to non-professional real estate investors who can buy properties with cash and do not rely on banks to approve the condition of the property.
In this article you'll learn about the different types of 203k loans, eligible properties and repairs and how to apply. This should give you the information you need to determine if the 203K loan is right for you.
The beauty of the 203k loan is that it allows you to include, in one mortgage, the needed money for repairs and related expenses such as labor and materials. Let's say you found a wonderful home with an abysmal kitchen. Using this loan you could include the price of all of the appliances, the design permit costs, cabinets and countertops as well as all of the installation costs, you can also include a 20% reserve for expenses over and above your repair estimates. On top of that you can wrap up to six months of mortgage payments into the loan so you won't have to make housing payments on both your new and current property
Down payment requirements
For example, let's say you found your dream house with an asking price of $150,000 and the estimated repairs totaled $30,000, your down payment would be 3 1/2% of $180,000 or $6300.
Of course you will have to meet the standard borrower requirements for all FHA loans including a reasonable credit score and verifiable income.
There are two types of 203K mortgages the regular 203K loan and the streamlined (or modified) 203k loan.
For the regular 203K loan the maximum mortgage allowed is the lesser of the as is value plus rehab costs, or 110% of the expected value after the property has been rehab. This is typically not an issue in that oftentimes homes in need of repair are listed at a discount over and above the amount of work needed.
The streamlined loan was designed for less expensive rehabilitation projects and the improvement costs are capped at $35,000.
Both the regular as well as the streamlined 203k mortgage can be used to refinance or purchase a property
203K loan was not designed for investors and is eligible to owner occupants only. There are also property type restrictions. Fortunately, there are oh wide range of properties eligible and with a little work you should be able to find a suitable property. The following types of properties are eligible:
• Single family homes
• Duplex to 4-plexes
• FHA approved condominiums
• Residential portions of mixed use buildings
• Existing buildings which have been completed for at least one year
Financing Conditions and Allowable Rehab and Repair Expenses
The FHA requires that your home meets certain energy efficiency standards. This includes adequate caulking, installation, ventilation and appropriate HVAC system. Smoke doctors are also required adjacent to each sleeping area.
You must also meet all local codes and ordinances as well as comply with the minimum property standards as defined by the United States Department of housing and urban Development (HUD)
The energy efficiency standards include caulking, insulation and ventilation as well as using the correct size heating and air conditioning systems for the home. The home is also required to have smoke detectors adjacent to each sleeping area.
In unbelievable number of whole repairs and improvements can be included in your 203K loan.
• Some examples eligible improvements are:
• Room additions
• Site grading and drainage
• Bathroom remodeling
• Kitchen remodeling, including appliances
• Finishing an attic or basement
• Structural alterations and repairs
• Adding or decreasing the number of units in a dwelling (e.g., single family to duplex)
• New siding
• Second story addition
• Elimination of lead-based paint problems
• Heating, ventilation and air conditioning systems (HVAC)
• Energy conservation
• Disabled access
Swimming pools, tennis courts, helicopter pads and other luxury items are not eligible for this loan. However, some borderline items that one might consider luxuries such as whirlpool bathtubs are allowed. Talk to your lender about what you can finance in what is beyond the scope of the lone. Todd
Applying for an FHA 203(k) Loan
During the application process, the borrower is required to create a "detailed proposal showing the scope of work to be done including a detailed cost estimate on each repair or improvement of the project."
An appraisal estimating the value of the property after the renovation has taken place.
Do-it-yourself or hire a contractor?
The FHA states, "If the borrower wants to do any work or be the general contractor they must be qualified to do the work and do it in a timely and workmanlike manner." Moreover, "a borrower doing their own work can only be paid for the cost of materials monies can be allocated to cost overruns or additional improvements." Even if you are doing the work yourself, you must still include the cost of the labor. The FHA requires this because if you are unable to complete the work, there must be sufficient money to hire a contractor in the escrow account.
The work begins
Once you close on the purchase of the home, it's time to start the remodeling. The FHA requires that all of the repairs are done within 180 days. Some lenders may require a shorter time frame.
Although you'll have to begin making mortgage payments right away, you are allowed to finance up to six months of mortgage payments while the renovation is taking place. The rehab money is placed in an escrow account and released in a series of draws to the various contractors after the work is complete and is inspected to ensure hard approval. A final approval is also necessary once the entire project is complete.
The 203K loan is a great one. However, it does have its drawbacks you should be aware of. First, because of the additional risk for the lender, rates on the 203k loan are typically higher than with conventional FHA loans. Also, there is more paperwork involved in these loans will typically take 60 to 90 days to close.
Because of the added complexity, it is important to find a lender with experience with this type of loan to work with.
Also noteworthy, you may choose to hire 203K consultant to help with the paperwork. The FHA maintains a database of approved consultants. The fee to the consultant can be included in the mortgage and should cost about $400-$600 for a typical $20,000 renovation. The use of the consultant is not mandatory, and you are free to complete the paperwork on your own.
Let's face it the 203k loan finding a higher in the contractors and overseeing the renovations can be a lot of work. But the extra effort can pay off. If you found the perfect location to raise your family but have found the homes to be out of your price range, finding a 203K eligible fixer-upper might be the perfect solution for you.
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