Looking for that perfect house, in the perfect neighborhood? I’ve worked with many buyers over the years who quickly realize that finding a house that has everything they want is a challenge. Unfortunately, some have passed on great homes simply because the house needed some modifications and they didn’t have the cash flow to take on a home remodel project on top of purchasing the home. It’s true that traditional lenders will often only give you a loan based on the value of the home. There is another option, however. The Federal Housing Authority (FHA) has a specific loan called a 203k loan that is designed to allow buyers to include the costs of repairs and remodeling in their loan.
203k and 203k Streamlined Loans
The FHA has two 203k loans available for remodels and repairs, depending on the extent of the work needed. A traditional 203k loan covers major remodels, including room and second story additions, roof replacement, installing updated plumbing or electric, heating and air conditioning, bathroom and kitchen remodels, and even the addition of a deck or patio. The amount you can get through a 203k loan is determined in one of two ways. First, you can get an appraisal of the “as-is” value of the home and add the costs of repairs to get the total loan amount. Alternately, you can apply for a loan for 110 percent of the estimated value of the property once the repairs are complete. The most attractive feature is that buyers get their loan with only 3.5 percent down.
A 203k streamlined loan is for homes that do not need quite such an extensive remodel. It cannot be used for any structural repairs. It can include things like painting, new appliances, weatherization treatments, basement waterproofing, or new windows and doors. The streamlined loan amount is based on the purchase price plus up to $35,000. The streamlined loan does not require buyers to use professional contractors. However, lenders will require evidence that you have the skill to do the work yourself. If the remodeling part of the streamlined loan was less than $15,000, you will not be required to have an inspection upon completion. You can simply provide a letter or receipts from your contractor to prove the work was done. If the amount is over $15,000, however, you will need to have an inspection to prove the work was completed.
What’s not included? Neither 203k loan covers landscaping or luxury projects, such as swimming pools. With both types of 203k loans, borrowers much occupy the property themselves. These loans are not intended for people buying investment properties that will be leased to tenants. The FHA also requires that the property not be vacant for more than 30 days. The work must start within 30 days of closing and finish within six months.
Pros and Cons
The big attraction for these types of loans is they give buyers the opportunity to purchase a home in need of repairs that they otherwise could not afford to purchase and remodel. Additionally, interest rates are low and down payments are minimal. Credit score requirements are also not as high as with traditional loans. Most FHA lenders require a score of 640 or higher. Here are two other big perks. The FHA will give you a contingency reserve of up to 20 percent just in case the renovations exceed the estimated costs. So, you won’t have to stop in the middle of your remodel to find more money. Secondly, the FHA has a provision that gives you money to pay your mortgage for up to six months in case you have to live somewhere else while renovating.
There are some drawbacks, however. All FHA loans require buyers to pay mortgage insurance for a minimum of 11 years and usually for the life of the loan. However, in January the FHA announced it was lowering mortgage insurance rates to 0.85 percent, down from 1.35 percent. So, while mortgage insurance may increase your monthly payment, the lower interest rates will still keep your monthly payment fairly low compared to traditional lending. Additionally, 203k loans can take a while to process. You’ll have to submit a detailed proposal that includes repair estimates, an appraiser’s estimated value of the home in its present state and the value of the home once renovations are complete. All this will require coordination. So, you’ll need to have some patience.
How to Get Started
The first step is to work with your realtor to find the home of your dreams. Don’t miss out on your favorite neighborhood just because the home is lacking a second bathroom or desperately needs a kitchen remodel. Your realtor’s knowledge of home values can help you determine if investing in a remodel is worth it. For example, you would not want to improve your home beyond the value of comparable homes in the area since you may not be able to recoup your investment down the road. Your real estate agent is an invaluable resource. He or she can direct you to FHA lenders in your area, trustworthy contractors, and appraisers to help the process run smoothly. I would love to be your resource through the exciting process of finding your dream home. Contact me today to find out what properties are available in your area.