The 203K loan enables homebuyers or existing homeowners to make changes to a home with the use of the proceeds from the loan. This loan, which is one program, provides homebuyers or homeowners that are refinancing with the money necessary to not only purchase or payoff an existing mortgage, but also the funds necessary to fix up the home. These changes can range from changing the paint color in a home to completely demolishing an entire home and starting from scratch.
Reconstructing a Home
What are the requirements in order to be able to reconstruct a home with the 203K program? There is one big requirement – you cannot change the foundation. The foundation that is existing must be what is used to build the new home. The foundation must meet the following requirements:
- Structurally sound
- Able to hold the new structure being built
The loan consultant in charge of the 203K loan will secure approval from a structural engineer that can attest to the fact that the foundation is capable of meeting the above requirements before moving forward with the loan. This is an added step that is only necessary on 203K loans that are restructuring a home on an existing foundation.
What Changes can you Make?
Reconstructing a home basically means that you are starting from scratch. You are able to make as many changes to the home as you see fit as long as they fit within 110% of the future value of the home. The home can be as close to new construction as you could get without building a new foundation. You cannot, however, use this loan for new construction – the home must be existing for at least 12 months in order for the 203K loan to be used.
How to Start
If you wish to reconstruct a home with the 203K loan, you must meet the FHA requirements. The basic requirements to qualify for this program include:
- 580 credit score
- Debt ratios around 29/41
- Adequate housing history, whether rental or mortgage history
- Stable income and employment for the last 2 years with the probability of continued employment in the future
Once you know that you might qualify for FHA financing, you can apply with a lender that offers 203K loans. This requires two things:
- A lender that is FHA approved
- An FHA lender that offers 203K financing
Not every lender will offer 203K financing, so you may have to shop around to find a lender willing to work with you. Once you find a lender, the hard work begins.
The first step is for the lender to figure out the post-renovation value of the home. This is done with the help of a loan consultant and appraiser. You will need to provide the lender with a list of the renovations you plan to make, even if that means tearing the house down and starting again. A detailed list will provide the appraiser with the information he needs to come up with the future value of your home.
In addition to the work to be done, the lender will need to know the extent of the work, who will do it, how much it will cost, and how long it will take as this all plays a role in your ability to obtain an approval for the 203K loan. For the most part, you cannot do the work yourself; you must hire contractors to do the work for you. Your loan consultant and lender will have a say in which contractors you use as they will need to look at the work write ups and how much everything will cost. It helps to have estimates from several contractors to help you find the one that is not only the most cost effective, but has the most experience in the work you need done.
Once you have approval for the loan, the remainder of the loan process is the same. You must get a clear to close on the loan before you can start working on the home. This means that you meet all of the requirements of the lender, supplying all of the necessary information to show your worthiness for the loan. This means supplying pay stubs, W-2s, bank statements, employment information, and any other information the underwriters needs for your loan. Once the loan closes, the lender requires you to start the work within 30 days. If you are completely renovating the home, you will not be able to live in it; this means finding somewhere else to live for 6 months, as that is the length of time the FHA allows for the work to be completed on the 203K loan.
If you wish to demolish a home and start from scratch, the 203K loan is a good option. It allows you the money you need to get started without having any capital. It is one of the most fluid ways to get the cash you need to make the changes you desire on a home you wish to purchase or a home you already own.