A rundown home or a house that needs repair usually discourages potential buyers. Or if they ever decide to pursue the purchase, it prompts them to take out another loan to cover the cost of repairs. These loans are usually costly, with the duration time lasting only up to 6 months to a year. Moreover, a lender may not approve the loan you need because the chosen abode, which you may have wanted to remodel as to your own specifications, is considered uninhabitable.
Fortunately, the FHA or Federal Housing Administration, the housing wing of the HUD (Department of Housing and Urban Development), has come up with a solution to get around this common problem. Instead of taking out a second loan to fund the necessary reparations, homeowners can now compound these loans into one mortgage loan through the FHA 203K Loan Program.
In addition, if you already own a home and you want to make some changes to your current property, you can refinance through the FHA 203K Program to cover the cost of rehabilitation.
What is the FHA 203K Loan Program?
The FHA 203K Loan program is designed to help potential homebuyers purchase a residential abode that needs significant repairs. In order to avail of its advantages, you must work with an FHA-approved lender. You also need to be specific of the work you want done to the property as it will be a determining factor for the final value of the home after all the repairs had been made.
In simple terms, you will be given the financing both to do the repairs and buy the home at the same time.
What are the Types of 203K Programs?
203K is divided into two categories based on the limitations of repairs allowed for each loan.
The Full or Standard 203K Program allows maximum benefits for significant repairs that include structuring, remodeling, or landscaping, among others. If you are thinking of adding a garage or a room, this is the 203K program for you.
On the other hand, the 203K Streamlined Program is more limited and is provided for non-structural repairs such as new roofings, repainting, and energy-conservation improvements. The total cost of the repairs should not exceed the $35,000 limit.
The Role of the Consultant
These two types of loans differ not only in the amount that you can get. In the Full 203K Program, you need to hire a consultant to help you determine the right loan amount, negotiate costs with the contractors, go over the contract to ensure fairness among all parties involved, and what changes need to be done in the home.
Which Properties Qualify?
For starters, your property of choice should first pass the general loan requirements set by the FHA. But to qualify for the 203K Program, the home should be:
- Situated in a location where you want to move in
- Has been torn down but the structural foundation remains in place
- A single family home usually for four that has been constructed and completed for at least a year
- Is not a co-op, although condos are considered eligible
What are the Program Requirements?
- Find a property. Submit a purchase offer that specifies your potential use of the FHA 203K program.
- Submit application to one of HUD’s approved lenders for FHA 203K loans. The application must contain a detailed list of the repairs you wanted done to the house, including estimate costs of each.
- These lenders will have requirements of their own which you will have to meet. These usually include credit score limits, DTI ratio, and income statements. Submit the necessary papers and documents to be approved.
- After the loan application is approved, a selling date is designated wherein the seller will receive their payment and the money for the renovations and repairs will be forwarded to an escrow account. This account will be controlled by the lender.
- After closing has been completed, work for rehabilitation will begin. An inspection will be conducted on the property under the order of the lender to assess if the property has met expectations and due repairs have been satisfactorily carried out. If the target was met and the property has been restored back to its livable condition, the rest of the contract will take effect. All parties will receive their final payments using the fund in the escrow account.
Before you get started, make sure you have the right people to guide you. Let us help you make the right connections. Contact us to get matched with one of our lending professionals today!