Are you tired of the way your house looks? Maybe you would love to change the interior color of the entire house or you would love to add an island to your large kitchen. All of these things and more are possible with the 203K refinance program. This FHA based program enables you to refinance your current mortgage at its loan amount and finance additional money to make the necessary or desired changes to your home. You can choose to use the streamline 203K program and limit your changes to a dollar amount of $35,000 and avoid any structural changes or you can make as many changes as you see fit up to the cost of 110% of the predicted future value of your home.
Start with the FHA Approved 203K Lender
The first step is to find an FHA approved lender that offers the 203K loan program. Not every FHA lender offers them, so you may have to shop around a bit. Once you have a lender, you will go through the standard pre-qualification process to see if you are a good fit for the FHA program. The standard requirements for an FHA loan are what apply to the 203K refinance program. In general, you need:
- Credit score above 580 (some lenders like it higher)
- A debt ratio no higher than 31/43
- Consistent employment
- Stable income
- No collections, bankruptcies, or foreclosures in your recent past
As long as you meet the minimum requirements, the lender will move onto the next step which means figuring out what changes you can afford to make to the home. This next step is a multi-step process as there are more people involved in the decision.
Find out the Appraised Value
The lender will need to know the appraised value of your home as it is right now. This value will help to determine the future value after the desired changes are made. The appraiser can predict the future value based on your initial plans for changes as each change has a designated impact on your value. With the predicted future appraised value in hand, the lender can determine what 110% of that amount is to come up with your maximum loan amount. This is an important number as it will be what helps you determine which contractors you can afford to use for the work you wish to have done.
Find 203K Contractors
Once you know the amount of money you have to work with, it is time to find contractors. These are the people that will do the work on your home. Generally, homeowners are not qualified to do the work, unless it is something simple like painting the interior and you can prove to the lender that you have the supplies or the money to purchase the supplies as well as the time to get the work done within 6 months or the designated time frame. A majority of the time, however, you need to find contractors that can do the work for you. The lender will have a say in who you use for your contractors, so it pays to shop around. You must find professionals that have the appropriate licensing and insurance as well as the experience to do the work. In addition, the estimates the contractors provide must be in line with the money you have available to have the work completed. Sometimes, you will have several contractors bidding for the job and the lender can help you determine who would be the best fit for the job.
203K Refinance Loan Processing
Once you have all of your ducks in a row, it is time to get the loan processed. This means that you provide the lender with the following documents:
- Last 2 paystubs
- Last 2 years’ W-2s
- Last 2 years’ tax returns (if you are self-employed or work on commission)
- Information on your existing loan that the 203k loan will pay off
- Estimates from the contractors
- Contract from the contractors to do the work
Every loan is different, so your lender might require a little more information from you as they process the loan. The quicker you provide the documentation they need, the quicker the loan can close.
Closing the Loan
Closing the loan works a little differently than any other loan type. With the 203K refinance program, the new lender will pay off your existing lender as a typically refinance works. After the lender is paid off, the remaining money is placed in an escrow account, minus any money the contractors requested up front to get the work started. A small percentage of the money is typically disbursed right away – the remaining money is put away and disbursed only as the contract states and as the work is completed. The lender has complete say in when the money exchanges hands and will not release the final payment until it is certain that all mechanics liens are off of the property and the work is done to the lender’s as well as your satisfaction.
The final step is when the work begins! The contractors typically have six months to get the work done with specific check-in points with the lender to determine that everything is on schedule. The lender and the FHA hold tight to that 6 month maximum, so it is important to get the work done on schedule by choosing a reputable contractor.