How To Fund Repairs and Upgrades With an FHA 203(k) Rehabilitation Mortgage
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 loan 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 Loan
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 streamlined 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 203k loans:
- Roof repair, gutters, downspouts
- Existing HVAC systems
- Plumbing and electrical systems
- Flooring
- Painting
- Appliances
- Weatherization
- 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
Additional Requirements
- 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
According to HUD (Housing and Urban Development)
Limited 203(k) Mortgage
FHA’s Limited 203(k) program permits homebuyers and homeowners to finance up to $35,000 into their mortgage to repair, improve, or upgrade their home. Homebuyers and homeowners can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or an FHA appraiser. Homeowners can make property repairs, improvements, or prepare their home for sale. Homebuyers can make their new home move-in ready by remodeling the kitchen, painting the interior or purchasing new carpet.
Summary:
Section 203(k) insurance enables homebuyers and homeowners to finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of their existing home.
Purpose:
Section 203(k) fills a unique and important need for homebuyers. When buying a house that needs repair or modernization, homebuyers usually have to follow a complicated and costly process. The interim acquisition and improvement loans often have relatively high interest rates, short repayment terms and a balloon payment. However, Section 203(k) offers a solution that helps both borrowers and lenders, insuring a single, long term, fixed or adjustable rate loan that covers both the acquisition and rehabilitation of a property. Section 203(k) insured loans save borrowers time and money. They also protect the lender by allowing them to have the loan insured even before the condition and value of the property may offer adequate security.
For less extensive repairs/improvements, see Limited 203(k). For housing rehabilitation activities that do not also require buying or refinancing the property, borrowers may also consider HUD’s Title I Property Improvement Loan program.
Programs and Guidelines can and often do change. Always contact a qualified Fannie Mae Homestyle® mortgage professional for the most up to date program and guideline information.
Need structural or more major repairs including foundation work? Check out the Full FHA 203k Rehab Loan.We are a Nationwide lender but are proud to locally serve the Dallas/Fort Worth Metroplex.Check out some local resources around the area:
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