So, you’ve decided you want to buy a fixer-upper. Homes that require a little bit of TLC are a great choice as there is typically less competition in the housing market. However, they aren’t for the faint of heart. These homes require more time spent planning and usually a bit more work. If you’re up for the challenge, you will most likely discover plenty of benefits. Let us get you on the road to homeownership by answering your first question: what is an FHA 203(K) rehab loan?
The FHA 203(K) rehab loan (also known as a renovation loan) allows a qualified borrower to purchase or refinance a home and finance renovations with a single loan. The convenience of this single loan removes the frustration and stress of having to apply for multiple loans.
The cost of renovations/repairs are not to exceed 110% of the after-improved value of the home.
The repairs allowed on a 203(K) are not restricted to FHA required repairs that would be deemed necessary by a consultant and/or appraiser, but can include a “wish list” of items such as:
- Modernization and improvements to the home’s function
- Structural alterations and reconstruction
- Elimination of health and safety hazards
- Reconditioning or replacing of plumbing; installing a well and/or septic system
- Adding or replacing roofing, gutters, and downspouts
- Adding or replacing floors and/or floor treatments
- Major landscape work and site improvements
- Enhancing accessibility for a disabled person
- Changes that improve appearance and eliminate obsolescence
Luxury items such as installation of a pool or fire pit are not allowed.
FHA offers two versions of the 203(K) program.
This program allows you to finance into the loan limited/non- comprehensive repairs:
- repairs that are not structural in nature,
- do not require plans, and
- cost less than $35,000 in total renovation costs including miscellaneous fees which we will address later in this document.
NFM Lending requires a minimum of $3,500 in repairs for this program. A HUD consultant is not required to perform an inspection of the property on this type of renovation program but may be used.
Work cannot displace you from the home for more than 15 days. If the house will be vacant for longer than 15 days, a Standard 203(k) must be used. The Limited program allows a disbursement at closing, up to 50% of the estimated materials and labor costs before beginning construction, but only when the contractor is not willing or able to defer receipt of payment until completion of the work, or the payment represents the cost of materials incurred prior to construction.
The Standard/Full 203(K) program allows you to finance in many more items than the limited program. Repairs with this type of 203(K) can include structural alterations, conversions from 1 to 4 units, work that requires plans, and many more. A HUD approved consultant is required. You must meet with the consultant to determine not only the mandatory items but any “wish list” items that are to be included in the cost of repairs.
With the Standard program, you can be displaced from the home for up to 6 months. Mortgage payments can be financed into the loan for the time that the house is deemed uninhabitable during the renovation period. The HUD consultant will deem the number months that can be financed into the loan. Please inquire as to the availability of financing in mortgage payments with your 203(K) specialist.
All loans require the use of a licensed contractor. Any repairs including the cost, materials used, scope of work, etc., should be completely decided upon prior to closing. You cannot act as your own contractor, and you cannot be related to the contractor. The contractor must be licensed and insured as a home improvement contractor and/or specialty contractor in the state or local jurisdiction where the work is being done. Choosing the right contractor is crucial to making sure that there are no issues after the work begins. It’s very important to obtain the contractors credentials up front and present them to NFM Lending for review as soon as possible.
While choosing to purchase a home that needs renovations isn’t as easy, it does provide several benefits. You’ll face less competition while purchasing and you’ll have higher equity then you would when buying a move-in ready home. If you’re ready to achieve your dreams of homeownership, include an FHA 203(K) rehab loan when considering your options.
For more information about the FHA 203(K) loan or other renovation loans, contact one of our licensed renovation loan originators. If you are ready to buy a home, click here to get started!