Buying a home can be both fun and exciting. But what if you found a home that meets all your needs except that it needs a little or even a lot of work? You may think twice about making an offer because of the perceived expenses to make those repairs. Not to worry, the FHA 203k loan allows you to purchase and renovate all with one mortgage loan!
Typically, you would have to take out a separate loan post-closing to cover these repairs or improvements.
Luckily, you have the option of taking out a 203k rehab loan, which allows you to finance the purchase of your home and any repairs with a single mortgage. With this loan, you can either buy or refinance and roll in the cost of the renovations.
We’re here to answer any and all questions you have about the 203k rehab loan process, and to help you get started on your home renovation project.
What Is a 203k Rehab Loan?
A 203K rehab loan or a renovation loan allows buyers of a home to pay for small cosmetic improvements or major home renovations. Whatever the home needs the FHA 203k rehab loan is here to help.
The renovations and structural house repairs are allowed to be included in the total amount of the loan. The primary reason these loans exist is to give you, as a homeowner, the ability to finance your home repairs while being able to afford the benefits of an FHA loan.
During this process, you’ll work with a contractor and or consultant that will supervise and oversee all of the building repairs.
How Does It Work?
If you’re trying to get an FHA 203k loan rehab, you will need to apply for this loan through a lender that offers this loan as it is different than the FHA traditional loan although both are backed by the Federal Housing Administration.
The qualifications for this loan are:
- Have a social security number and be a lawful resident of the United States
- Pay the minimum down payment of 3.5%
- Have a minimum credit score of 580
- You must be purchasing to use as a primary resident.
- Debt to income must meet program guidelines, typically 50-54% max
Keep in mind that HUD puts on the guidelines for the loan program but each lender will put overlays on top of the program to protect themselves.
How Do I Know If I Qualify?
Before you can apply for a 203k rehab loan or a rehabilitation loan, you have to do the following:
- Find a lender who has experience working with 203k rehab.
- Plan to buy or refinance a property that needs some minor or major repairs/renovations.
- Make sure that you meet all the criteria that your lender has set out for you (including confirmation of income, credit score requirements, and the debt to income ratio requirements).
What Happens Next?
Once you qualify and close on the property then the fun begins! The renovation on your dream home.
Some of the things to keep in mind for construction and again every lender will have different requirements. But we will review the basics.
- Repairs should start within 30 days of closing to ensure that within 6 months that all renovations are finished.
- Payment to the contractor can work several different ways so be sure to cover this with your lender. On a 203k streamline loan some lenders give 50% of the funds at closing and the other 50% once work is completed.
- If doing major renovations where the cost is over $35,000.00 then typically a HUD Consultant is required to be on the project. The consultant will do the progress inspections and funds are released after each inspection for the work that has been completed.
If once the project is complete there are any funds left over, its used to reduce the principal balance of the loan.
Do I Need a Consultant and What Can One Do for Me?
If you are doing more than $35,000.00 in repairs or there is any structural work to be done then yes you will need a consultant.
Here are some of the primary duties and responsibilities of a 203k Consultant :
- Preform upfront inspection of the property and write the 203k report. The report includes all mandatory repairs, recommended repairs and of course desired repairs.
- Handle progress inspections to insure work has been completed before funds are released.
- Provides draw paperwork to lender so funds can be disbursed.
- Keeps all parties on the same page and informs lender of any issues that may arise.
Now all of this sounds good, but how are consultants compensated? There is a fee based schedule that HUD has established and the cost is based on the size of the project and they are compensated per inspection.
What Kind of Repairs Can I Fund?
Thankfully, the FHA 203k rehab loan covers a broad range of repairs. But to give you a more complete and accurate picture of what kind of house you can buy, we created a list of repairs you can complete:
- Home heating and cooling systems like central air conditioning
- Bathroom and kitchen remodeling
- Gutters, ceilings and roof
- Gardens and landscaping
- Fixes to the foundation of the house
- Repairs for your swimming pool (you just can not build a new pool)
- Improvements to go green like installing solar panels
- Total gutting of a house down to the studs and completely renovating
- And many more items!
The only serious limitations are luxury items that aren’t a permanent part of the property. However, if you want to fund luxury renovations, there are loan options to help you.
NOTE: You may also want to red “Transforming an abandoned 1976 rural home – 203k Full Renovation Loan” HERE
Start Your 203k Rehab Loan Today!
Having a 203k rehab loan allows you, as a homeowner, to have the best of all worlds. You can purchase or refinance your home and keep it looking beautiful without having to take out pricey 2nd liens to get the renovations done !
If the information you’ve read about 203k rehab loans has made you excited to start your home renovation journey, contact us today!