FHA 203(k) Loan Program Provides Money For Home Repairs and Renovations
Thinking about buying a fixer-upper, but worried about coming up with the money to pay for the construction costs? Or are you wanting to renovate your existing home but just don’t have the available time or money? If so, the FHA may have a program to solve your problems. The section 203(k) program administered by the FHA provides funds to prospective and current homeowners to make repairs and/or do renovation work. A 203(k) loan combines a home’s purchase price and cost of repairs into one FHA mortgage, with only a 3.5% down payment.
A growing number of people are taking advantage of this program, a reflection of the large housing inventory caused, in large part, by foreclosures resulting from the recent economic turmoil. The FHA reports that the number of 203(k) loans taken out in 2008 nearly doubled from the previous year, with 2009 experiencing a 40% year over year increase. Potential homebuyers, attracted by relatively low market prices on foreclosed properties, are often left to contemplate how (and when!) they are going to be able to pay for the repairs once they purchase the house. This is not an uncommon scenario as foreclosed homes, which are often left abandoned, typically need extensive repairs. The 203(k) loan program solves this problem by enabling homebuyers to finance the construction work and start repairs on the home immediately after a loan closing. All residential properties, not just foreclosed homes, are potential candidates for the 203(k) loan program.
What is the FHA 203(k) Program?
The FHA 203(k) program is a home rehabilitation and repair program, designed to revitalize neighborhoods and spur homeownership. It can be used by people who are looking to purchase a new home, or by existing homeowners wanting to do repair or renovation work on their current home. What consumers end up with is a single FHA insured mortgage – the loan amount consisting of the home’s purchase price (or current loan balance in the case of an existing homeowner) plus the estimated costs of the construction work.
Normally, someone purchasing a home that is in need of repairs has to first obtain interim financing for the rehab repairs and then additional financing to purchase the home. In this scenario – once the repairs are complete the homeowner must then take out a new mortgage to combine the two loans. With the 203(k) program, on 24happliancerepair.com the other hand, a borrower need only obtain one mortgage, which covers the home purchase and the property rehab.
The 203(k) program comes in two flavors; a standard version and a streamlined version. With the standard program, the construction costs must be at least $35,000. The maximum construction costs are limited only by the estimated “as-improved” value of the house (i.e., the value an appraiser estimates the property will be after repairs/renovations are completed). All FHA mortgages, with or without a 203(k) loan, are subject to mortgage loan limits. The mortgage amount can range from $271,050 to $729,750, dependent on where the home buyer resides. The total mortgage amount, which would include any cost of repairs, cannot exceed 110% of the “as-improved” home value. The streamlined 203(k) program is used for situations where the construction costs are under $35,000.
To be eligible, properties must be one to four family structures that are at least one year old. Condominiums may qualify, though there are some added restrictions and limitations. Additionally, FHA allows “mixed use” properties (i.e., properties with both residential and commercial use) to be eligible for the program.
A partial list of what you could use a 203(k) loan for include; replace a roof, add a room, remodel kitchen or bathroom, landscaping, update appliances, repair termite or water damage, update electrical and/or HVAC systems. It’s also important to keep in mind that the program requires certain repairs (if needed) to be made. These mandatory repairs deal specifically with bringing the energy efficiency of the property up to code.
The FHA 203(k) loan does not come without some added costs and other potentially negative factors. Consumers need to carefully weigh the pros and cons in order to decide if this program is right for them.
o Homebuyer will incur fees up and beyond the normal mortgage closing costs. A supplemental origination fee – which is the greater of $350 or 1.5% of the portion of the mortgage that is being used for rehab purposes – is required. Additionally, a fee consultant (who is HUD approved) must visit the site prior to the appraisal to ensure compliance with program requirements. Expect to pay $100-$200 for this service.
o Takes longer time to close on mortgage loan – up to 4 weeks longs than a normal conventional mortgage