RENOVATION LOAN FAQs
What does FHA mean?
It means that your mortgage is insured by the Federal Housing Administration (FHA). Primarily, FHA loans are designed for low to moderate income borrowers. Allowing the borrower to obtain a loan up to 97% of the total value of the home. Since 1934, the FHA has helped over 34 million homeowners secure a loan for their new home. Ever since the start of the FHA program, it has steadily increased in popularity, even to this day we continue to see new FHA programs emerging, just like the FHA 203k loan.
What Is An FHA 203k Loan?
You have been searching for your perfect home the last six months. You are looking for a home that needs some cosmetic work so you can make it your own. Every time you come across the “perfect” home you submit a fair market value offer but then find out it was rejected and the homeowner accepted an all cash offer from an investor. The FHA noticed that this problem was accruing all across the nation and began to offer the FHA 203k. Which ultimately allows homebuyers to compete against real estate investors who are looking to purchase run down properties in sought after areas.
The FHA 203k renovation loan program provides the ability for new homeowners to obtain funds for both the purchase of their new property as well as any renovations that need to be done to their new home immediately after the close of escrow.
Who Can Qualify For An FHA 203k Loan?
The qualification process for an FHA 203k loan is very similar to that of a standard FHA loan. The program is meant for low to moderate income earners and secures up to 97% of the purchase price plus renovations cost. The program is meant for owner occupant homeowners or non-profit groups. Ever since 1996, the program has disqualified investors from purchasing properties with an FHA 203k loan.
Am I Allowed To Refinance My Existing Mortgage Loan Into An FHA 203k Loan?
The FHA 203k does allow you to refinance your current existing mortgage.
Are Single-Family Homes The Only Type Of Property That Qualifies For The 203k Program?
The 203k loan program is only eligible for the use on single family homes as well as on multi-family properties (1 to 4 units ). The loan can also be used for the purchase of more than 4 units if the homeowners intends to convert the building into 4 or less units. With specific guidelines that must be met, the 203(k) mortgage can also be used for a condo for improvement of the interior only. The FHA 203k loan can also be used to renovate the residential portion of a mixed-use building consisting of both retail or commercial space and residential.
What Are Some Benefits To An FHA Loan?
Some benefits include:
- Lower Cost — Due to the fact that they are government insured loans, the FHA offers extremely competitive interest rates to borrowers.
- MUCH SMALLER Down Payment — Being that these loans are intended for low to moderate income earners, the FHA have very low down payment requirements, with as low as 3.5% of the purchase price. To make it even easier to obtain the loan, the down payment can be paid by a family member, employer, or even a charitable organization.
- Simpler and Easier Qualification — Being that the loans are government insured, lenders are much more lenient with their terms and flexible to ensure both parties are happy with the loan terms.
- Less Strict Credit Score Requirements — Have you faced bankruptcy lately? Maybe you’ve been unable to pay off credit cards in the past? FHA insured loans are much less stricted with credit scores. To the point to even if the borrower has had credit problems such as a bankruptcy, there is still a possibly they will be able to qualify for an FHA loan.
- Mortgage Protection — The FHA has been helping out homeowners since the 1934, and being that they are government insured they truly help homeowners out in tough times. Maybe the economy has take a hit and you lose your job, or you are simply going through some tough financial times. Well, the FHA has many options for homeowners when they are going through those tough times to help them keep their homes.
What Are The Different FHA 203k Loan Types?
1. The Standard 203k – which is intended for use of more complex projects that requires structural changes. Some of these structural changes can include room additions, grading of the land, or any type of renovation that would prohibit the owner from occupying the property during renovations. If the renovations require any sort of engineering or architectural drawings and inspections the loan automatically falls under a Standard 203k.
2. The Limited 203k – this loan is intended for less extensive renovations that don’t exceed a total amount of $35,000. The Limited 203k loan is much simpler to obtain and less costly option when comparing it to the Standardized 203k loan. The Limited 203k doesn’t require the use of an architect, engineer, or consultant, things you will need when using a Standardized 203k loan.
As An Investor, Can I Qualify For An FHA 203k Loan?
Since 1996, investors have been prohibited to use an FHA 203k loan to purchase a property.
What If There Are Extra Funds Available Once Renovations Are Complete?
Excess funds that are available once renovations are complete will be used toward the principal of the loan. The other option, is to use the funds to make additional improvements to the property.
Is There A Time Limit For Renovations?
Renovations must begin within 30 days from the closing of the loan. Renovation must not exceed more than 140 days or the agreed time frame in the loan agreement.
When And How Are The Renovation Funds Distributed?
At the loan closes, funds are disbursed for the home purchase and, based on previously submitted and accepted contractor bids, renovation funds are placed by the lender in an escrow account. Similar to a regular conventional loan, funds are distributed for the purchase of the home when the loan closes. Funds for renovations are placed in an escrow account. These renovation funds are then distributed from the escrow account to pay the contractors as the renovation are being made, and once the final inspection is complete the last amount for the renovations are paid out.
Can The Borrower Perform The Renovations?
The borrower is allowed to do the rehab work in which they have expertise in. However, the borrower can not be paid for their work. The materials used to make the renovation can be fully financed by the loan.
How Is The Property Appraised?
An appraiser is handed a copy of the bids the contractors have drawn up. The appraiser then inspects and appraises the home and projects the value of the home after renovations are made.
What If The Home Is Uninhabitable During Renovations?
The Standard 203k loan allows for up to three mortgage payments to be included in the renovation funds for covering the period of when the home is unsuitable to live in. A Limited 203k loan can not be used for the purchase of property whose conditions are going to be uninhabitable during renovations.