The FHA 203(k) Loan: A Home Repair Loan And Mortgage All In One
If you’re looking at a fixer-upper, the Federal Housing Administration rehab loan may be the mortgage for you.
Are you interested in buying a fixer-upper, but don’t have the cash to remodel it? Or maybe you have saved money for remodeling and you’ve found a house you love, but your lender won’t allow you to buy it because the house isn’t considered habitable without toilets.
There are always properties on the market that weren’t maintained by cash-strapped former owners, were treated poorly by renters or were deliberately trashed by formers owners before they lost their home to foreclosure. Shouldn’t there be a way for someone like you to fix up these neighborhood eyesores and bring them back to life?
A Gift From the Government
There is, and it’s brought to you by the federal government. The Federal Housing Administration’s rehab loan product, the FHA 203(k) loan, was designed for individuals who want to rehabilitate or repair a damaged home so they can live in it as their primary residence. These loans are endorsed by the government to encourage lenders to offer what would otherwise be considered a risky loan product. Because of the risk and expense involved, rehab projects are normally handled by professional real estate investors who can buy properties with cash and therefore don’t need any bank to approve the property’s condition.
How Much Cash You Need
The FHA 203(k) loan lets you include the money needed for repairs and related expenses in the loan, such as materials and labor. If you wanted to buy a home in which the kitchen had been ripped out, you could include in the loan the price of new cabinets, counter tops, flooring, a fridge, stove, oven, microwave, sink, dishwasher, garbage disposal, and the cost to design, permit and install it all. The loan can also include a 10-20% contingency reserve for expenses above and beyond your repair estimates. You can also get up to six months’ worth of mortgage payments included to cover the mortgage while you’re renovating the home, so that you won’t have to make a double housing payment.
As of early 2010, you only have to come up with 3.5% of the home’s purchase price plus repair costs to buy a house with this type of loan. So if you were buying a house whose asking price was $150,000 and that needed repairs of $15,000, you would need 3.5% of $165,000, or $5,775, as your down payment. Of course, you’ll also have to meet the usual borrower requirements for an FHA loan, like having a steady, verifiable income and a good credit score.
FHA 203(k) loans are intended for owner-occupants, not investors. The following types of properties are eligible:
- Single-family to four-family dwellings
- Existing construction that has been completed for at least one year
- Tear downs, as long as part of the existing foundation will remain
- Moving an existing house to a new foundation
- Rehabbing the residential portion of a mixed-used (commercial/residential) property
- FHA-approved condos
With such a wide range of qualifying properties, almost anyone can find the right property for their tastes, and one that will also qualify for a 203(k) loan.
Applying for an FHA 203(k) Loan
In addition to the usual mortgage loan application requirements, such as proof of income, proof of assets and credit reports, the 203(k) loan application requires the following:
- The creation of “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. The home is appraised as it would be for any loan, except that the appraiser must estimate what the value of the home will be once the repairs and improvements are made. An as-is appraisal may also be required, but sometimes the purchase price can stand in for the as-is appraisal.
Completing the Rehab
Once you complete the purchase and the home is yours, you can start the repairs and remodeling. The FHA require all repairs to be completed within six months, although lenders can require a shorter time frame.
You’ll begin making mortgage payments right away, like you would on any home. After all, you own it–it doesn’t matter if you’re living in it yet. However, as mentioned earlier, you can finance your first few mortgage payments. The rehab and repair money is placed in an escrow account and released as the work is completed and inspected to ensure HUD approval. HUD must also approve the finished product once all work has been completed.
For more information on these loans, or if you want to get started please send me an email at firstname.lastname@example.org