203K Rehab Loan
FHA 203k loans allow buyers to purchase foreclosures and short sales that are sitting vacant due to any rehab work needed to make the property move-in ready. In addition to minor cosmetic upgrades, this loan can be used to completely remodel most 1-4 unit dwellings, and borrowers can even finance in up to 6 month’s (principal, interest, tax and insurance) payments to avoid having to worry about additional housing costs while the property is being renovated. There are 2 types of 203K - Streamline and Standard.
How Does a 203k Streamline Loan Work?
It used to be that you bought a home and then applied for a home equity loan to fix it up, resulting in two loans. But that’s no longer required now that the FHA Streamline 203K is available. A Streamlined 203k loan is figured into the original loan balance, resulting in one, fixed-rate mortgage loan. And, the mortgage balance can exceed the purchase price of the property. Generally speaking work is finished between 45 and 90 days. But we do allow up to 140 calendar days for completion if that amount of time is needed. Once the work is finished the final inspection will be done by the appraiser.
Under the Streamlined program, there is a maximum of $35,000 which can be financed in the mortgage amount to improve or upgrade the home.
No “structural repairs” are allowed under a Streamlined K, however, making or correcting any structural items is not considered to be minor.
The minimum of $5,000 of required and substantial improvements that will increase the marketability and value of the home must first be included. Any repairs and improvements must comply with HUD’s Minimum Property Standards and must meet all local building, zoning and other codes.
Minimum required repairs include any health and safety repairs like peeling lead paint or replacing missing railings. Whether you want those items included or not, all health and safety issues must be addressed first. Smoke detectors must also be added if missing.
The Process of the Streamlined 203k
Find the home you’ll want to purchase and determine what improvements need to be made to the property. The offer is written the same as any other, accept you’ll want to make sure that there is language stating the purchase is contingent upon borrower acquiring an FHA 203k Loan.
In order to complete the financing of the improvements, you will need to meet with a contractor to determine what kind of work you are planning and how much it will cost. The contractor will give you a bid, which you’ll need to pass on to the lender. The lender will order an appraisal to determine what the value of the house will be once all of this work is completed.
Keep in mind, you’ll also need to be qualified for the full loan amount which is based on the purchase price plus the additional cost of repairs. Once the loan is approved, you will go to closing like you normally would. The amount that will be needed to do all of these repairs or improvements will be placed into an escrow account held by the lender. As the work is being completed, there will be draws from the account to pay the contractor.
Type of work for Streamlined 203(k):
- Roof repair, gutters, downspouts
- Existing HVAC systems
- Plumbing and electrical systems
- Repair, replace or add exterior decks, patios, porches
- Basement waterproofing
- Window and door replacement and exterior siding
- Septic and/or well repair or replacement
- Improvements for accessibility
- Lead-based paint stabilization or abatement of lead-based paint hazards
What can’t you do? Ineligible improvements under the Streamlined 203(k):
- Major structural repairs
- New construction (adding a room)
- Repair of structural damage
- Repairs requiring detailed plans and specs
- Any repair taking more than 3 months to complete
- Repairs that would necessitate more than 2 draws
- Luxury items that are not a permanent part of the real estate
- Jacuzzi tubs, hot tubs, pools
What does the Contractor you select need to do?
- Provide written work plan and cost estimates
- Must include nature and type of repair and the cost of completion
- Must be licensed and bonded for each specialized repair
- Must agree in writing to complete the work for the amount of the cost estimate and within the allowed time
The limited Streamline 203K option allows for repairs up to $35,000. Typically limited to cosmetic type repairs. The Standard 203K is for larger repair projects with more flexibility for repairs allowed.
If the property needs more work than what Streamline allows, the Standard 203K loan may be the next option. Call me to find out more about the 203K Standard Loan.
...and by the way, 203K loan goes up to 110%LTV.
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