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Rehab and 203k Loans

Posted on June 1, 2014 by Ray Williams (NMLS #216267).

Crucial to community revitalization, the FHA 203(k) program works toward the repair and rehabilitation of eligible properties. There are also conventional rehab loan options that are similar to the standard 203k loan. The Department of Housing and Urban Development has developed this program to help families obtain housing while modernizing neighborhoods. They are designated for damaged homes or homes desperately in need of restoration. Your loan will cover the cost of necessary repairs while keeping your down payment very low. It also works for existing homeowners whose homes are in need of renovation. You can use this mortgage to wrap in rehab/remodel costs at the time you close on your house, how awesome is that?

According to realtor.com:

“Which houses qualify?There are two types of FHA 203k loans, regular and streamlined. Regular 203k loans are for homes that need structural repairs, and streamlined loans are for those that need non-structural repairs.In order to qualify, homeowners must plan to live in the home they are repairing. The following types of residences qualify:

  • Tear-downs: As long as part of the foundation will remain, houses that need to be destroyed and rebuilt are eligible.
  • Existing construction that is at least a year old.
  • Single-family, two-family, three-family or four-family dwellings.
  • Condos: if they have been approved for FHA loans.
  • Mixed-use properties: If you are repairing only the home portion, a mixed residential/commercial property can qualify.
  • Homes needing to be moved to rest on a new foundation.

Which repairs qualify?The FHA has specific guidelines as to which types of repairs qualify for 203k loans. The lender will also stipulate which repairs you can make.Allowable repairs include:

  • Disability access
  • Heating, ventilation and air conditioning
  • Plumbing
  • Roofing and flooring
  • Energy conservation
  • Kitchen remodeling
  • New appliances
  • Room additions
  • Decks and patios
  • Bathroom remodeling
  • Room additions or second-story additions
  • New siding
  • Finishing an attic or basement
  • Site grading

Labor costs must be included in the loan, even if the homeowner performs the repairs. The repairs must be completed within six months.How much does it cost?The FHA 203k loan amount has to include the price of the home plus the expected price of repairs. The homebuyer has to provide a percentage of the loan as a down payment. That percentage is usually far below that required by conventional loans and other FHA loans.In order to apply, the loan applicant has to provide proof of income, proof of assets and credit reports. In addition, the applicant has to provide a home appraisal, including how much the home will be worth after the improvements are made. The applicant also has to present a detailed proposal of the work required on the home, including a cost estimate of each repair.Some loan seekers hire a 203k consultant to prepare the extra paperwork. The consultant’s fees can be included in the loan amount.Special stipulations to consider. An FHA 203k loan is especially beneficial to those who cannot afford a finished home and are willing to take on a fixer-upper. If you choose to apply for a 203k loan, keep the following in mind: Many lenders do not offer 203k loans. You have to find a lender who is willing to work with you. Expect to spend a lot of time on document preparation and bureaucracy. FHA 203k closing can take from 60 to 90 days. Interest rates tend to be high, due to the risk involved to the lender. The home improvements cannot guarantee to increase the value of the home.Be careful not to over-invest in the home. Do not pour more money into the house than you could ever recoup in a resale.”

Schedule a consultation to decide which loan option best suits you!

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