If you’ve been passing up buying a home because it requires cosmetic repairs, FHA has a special (203k Rehab) mortgage program that provides funds for repairs and/or upgrades.
Not to be confused with FHA’s full 203k program, a Streamlined 203k loan eliminates much of the paperwork and simplifies the process to obtain rehab funds. The primary function of the streamline 203k is to aid with those cosmetic or minor repairs.
How Does a Streamlined 203k 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.
Borrowers are not required to hire professional consultants, licensed engineers or architects. The appraiser will put together a list of recommended (and in some cases required) repairs / improvements. A timeframe is established for the completion of the work.
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 no minimum but 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 purchase contract 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):
What can’t you do? Ineligible improvements under the Streamlined 203(k):
What does the Contractor you select need to do?
Need structural or more major repairs including foundation work? Check out the Full FHA 203k Rehab Loan.
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