Are you looking to purchase a residential home that requires renovation work? If so, FHA 203(K) loan program may be an appropriate financing option for you.
Generally, for those who wish to buy a home that needs fixing up, the normal course of action would be to buy the property with financing through an unconventional lender such as a private hard money lender. Often times, the interest rates and fees charged on such loans are extremely high. The duration of such loans is also quite short, usually between 6 months to an year. These restrictions have generally discouraged new home buyers from purchasing residential properties in need of repairs.
If the home you wish to buy is need of minor, or major repairs, you may be able to handle the purchase transaction and also secure the necessary funds through a single loan using the 203(K) FHA rehab loan. In many situations where traditional or conventional financing is rare or non-existent for renovating a primary residence, applying through an approved FHA lender for 203(K) financing can be the best course of action.
FHA (Federal Housing Administration) is the HUD’s (Department of Housing and Urban Development) division that administers various single-family mortgage insurance programs through approved lenders to aid both the owners and new buyers of residential properties. FHA does not directly engage in the underwriting, processing or funding of the residential loans it insures. FHA approved lenders handle all aspects, from origination to closing to funding.
The section 203(K) of the National Housing Act was amended in 1978 by the Section 10(c) (1) of the Housing and Community Development Amendments. The main objective of the revision was to enable HUD to take measures that would allow for the promotion, restoration, rehabilitation and preservation of the existing housing stock in the country.
FHA’s 203(K) loan program allows new home buyers and existing homeowners to finance the cost of repairs and improvements that need to be performed on their single-family homes. FHA program requires the property to be a primary residence of the borrower. In addition to financing individuals and families, the 203(K) rehab program also provides financing to organizations engaged in the renovation of properties to revitalize neighborhoods.
Many FHA approved lenders have successfully partnered with various state, local housing agencies and non-profit companies to provide financing under the 203(K) program for initiatives that involve rehabilitation of damaged properties in challenging localities. Financial resources from other program such as HUD’s HOME, HOPE and housing grants were used in conjunction with the 203k rehab loan program to assist borrowers by various housing agencies, at all levels.
The expertise of the housing agencies has also helped a lot of 203k lenders in effectively dealing with rehabilitation application processing. A number of loan programs that adhere and complement the 203(K) guidelines have been introduced by local housing agencies to help homebuyers and homeowners in the areas they service.
Lenders are also obligated under the community reinvestment act to demonstrate their commitment to lend in lower income communities. Participating in 203(K) loan programs has been one of their preferred ways to do so in the recent years.
Compared to conventional loan programs, the process and the requirements involved in securing 203k financing can be quite difficult. To secure a 203(K) insured loan for rehabbing or renovating a single-family home, the best choice would be to approach an experienced FHA approved lender that lends in your area. Before even approaching a 203k lender, a borrower can visit their local HUD homeownership center for preliminary assistance and guidance.
FHA 203k Loan – Overview
An FHA 203k loan is a type of FHA-insured home loan that allows homebuyers and homeowners to finance the cost of repair work to improve/renovate/rehabilitate their primary residence into their mortgage. Most of the qualifying criteria are similar to the standard FHA loans that involve rehab financing. The procedures related to the renovation administration and fund disbursement are handled according to the 203k loan requirements stipulated by HUD.
A borrower can use the 203k loan program for quickly and efficiently accessing the cash necessary to pay for repairs or improvements to their primary dwelling. The work write-up and estimates based on the reports from 203k consultant, contractor and appraiser assist a 203k mortgage lender in underwriting the loan.
Energy efficient improvements, structural changes and appliances are just some of the wide range of repairs and improvements eligible for 203k financing.
Types of 203k Loan Programs
There are two types of rehab loan programs that fall under FHA 203k. The specific and appropriate loan depends on the type of repair work and the total cost associated with them. Both the loan programs can be used for either purchase or refinance transactions.
Standard (K) Program
The 203k standard rehab mortgage is used for financing properties in need of extensive repairs. Major additions and structural changes fall under this loan type.
A standard 203k loan program allows a loan amount that is 110% of the after improvement value determined by the appraisal. A 203k consultant is required to perform a thorough home inspection in order to do the complete work write-up. A minimum of $5,000 must be borrowed for the sake of repairs. The maximum loan amount depends on the proposed appraisal value. All other qualifying guidelines are pretty much similar to other FHA loans.
Streamline (K) Program
The FHA 203k streamline loan is primarily used for repairs that cost less than $35,000. Most cosmetic improvements and common repairs that do not involve structure, addition or conversion can be financed with a streamline loan. There is requirement for a minimum loan amount. The entire 203k streamline guidelines are designed to make the approval process flexible and easy.
A 203k standard program is particularly suited for projects that need major reconstruction and renovation; while the 203k streamline is appropriate for repairs that fall below $35,000. Homeowners can buy new appliances and also finance all other common repair works with the 203k program.