Kitchen remodeling is often one of the largest renovations any homeowner desires. Whether you purchase a new home or wish to refinance your existing home, if you use the FHA 203K loan, you can use the funds to remodel your kitchen. The good news is that kitchen remodels usually help you increase the value of your home and most homeowners can obtain more than 80 percent of their investment back.
The Different Ways for Kitchen Remodeling
There are two ways to pay for kitchen remodeling with the FHA 203K loan. If your repairs are minor, such as refacing the cabinets, replacing the faucet, or replacing the appliances, you could use the Streamline 203K. This program requires less verification and may not require you to use a 203K loan consultant. The repairs included in the Streamline 203K cannot be structural, however, and the maximum amount of the repairs cannot exceed $35,000.
If you wish to perform major renovations in the kitchen, which include structural repairs, you can still finance it with the 203K loan; it just has to be the full program. This program requires more stringent verifications and the use of a loan consultant. This loan does not have a dollar amount maximum; the lender determines the maximum loan amount based on the predicted value for the home after the repairs. Most borrowers can take out 110 percent of this value unless this amount is greater than the FHA loan limits for the area.
Just like any other FHA loan, the guidelines to qualify for the 203K loan are simple. The most common guidelines include:
– Minimum credit score of 580 – Many lenders will require a score slightly higher than this, but this is the minimum that the FHA set. If one lender turns you down due to a low credit score, consider trying a different lender that might have different guidelines.
– No more than one late housing payment in the last year – The housing history reporting on your credit report is of utmost importance. The FHA and the lenders want to see that you can make your housing payments without a problem every month before they provide you with funds to fix up a home.
– Timely credit history from other sources – Any other credit you have outstanding should also be paid on time. This credit does not hold the same importance as the housing history, but too many late payments in the last 12 months can work against you.
– Debt ratios around 29/41 – The debt ratios for FHA loans are slightly higher than conventional ratios. They allow a 29 percent front-end ratio, which is your principal, interest, taxes, homeowner’s insurance, and mortgage insurance. On the back-end, they allow a total debt ratio of 41 percent. This includes your total mortgage payment along with any other monthly obligations, such as car payments, student loans, and credit card payments.
If you have any factors that make your loan profile risky, such as a low credit score or a high debt ratio, a great way to offset that is with reserves. This means money in the bank that covers a specific number of months of your mortgage payment. Typically between six and twelve months is the ideal amount of reserves to have on hand, but any liquid reserves can help your case.
A Required Contractor for Kitchen Remodeling
One of the strictest guidelines surrounding kitchen remodeling with the 203K loan is the need to have a licensed contractor do the work. Even if you are completely qualified to remodel your kitchen, you have to be able to complete it in 6 months or less; there are no exceptions. If you have a full-time job, chances are a kitchen remodel will not fit into your free time in less than six months. A licensed contractor has to abide by these rules if he wants to get paid, which is why the FHA and the lenders usually require the use of a contractor.
The contractor will create an outline of the costs necessary to remodel your kitchen and the lender will approve or deny it. The loan cannot close and work cannot begin until all negotiations are complete and the lender approves everything that the contractor suggests. The contract needs to provide accurate details regarding every cost for the remodel. Any money above and beyond what the contract states must be an unexpected cost due to issues that were unforeseen. Most lenders require you to have a contingency account of at least 10 percent of the total cost for the renovation for cases like this.
A Loan Consultant
The loan consultant will become your partner when going through the 203K process with a kitchen remodel. The loan consultant can work as the liaison between you, the contractor, and the lender. This cuts down the headaches and the work you must perform in order to get everything done. If you choose the right loan consultant, he will have experience with the specific type of remodeling you desire, which will help ensure that the work gets done in a timely and efficient manner. The right consultant also knows what to expect and what costs are normal for the desired renovations.
There are a lot of factors that go into the kitchen remodeling with the FHA 203K, but you can make the process go smoothly with the right help. Make sure to choose a lender and a loan consultant experienced with 203K loans. You should also interview several contractors to see what their experience with this loan program is like since the requirements are so strict. There is no room for error or delays, as the specifications clearly state that all work must be completed within 6 months of closing on the loan. Taking the time to do your homework can help you have a seamless process with a beautiful kitchen remodel in the end.