FHA 203(k) loans are intended for owner-occupants, not investors. The following types of properties are eligible:
With such a wide range of qualifying properties, almost anyone can find the right property for their tastes, and one that will also qualify for a 203(k) loan.
Financing Conditions and Allowable Rehab and Repair Expenses
Regardless of what work you may think the house needs, the lender and FHA have their own requirements that you'll also have to meet. The U.S. Department of Housing and Urban Development (HUD) "requires that properties financed under this program meet certain basic energy efficiency and structural standards" to "comply with HUD's Minimum Property Standards (24 CFR 200.926d and/or HUD Handbook 4905.1) and all local codes and ordinances."
The energy efficiency standards include caulking, insulation and ventilation as well as using the correct size heating and air conditioning systems for the home. The home is also required to have smoke detectors adjacent to each sleeping area.
You might be surprised by the variety of home repairs and improvements that can be financed with the 203(k) loan. These include, but are not limited to:
The FHA does not allow "luxury items" such as tennis courts, swimming pools, hot tubs and barbecue pits to be financed with a 203(k) loan, but some items that you might think of as luxuries, such as whirlpool bathtubs, are actually allowed. Talk to your lender about the specific improvements you want to make to see what you can finance.
Applying for an FHA 203(k) Loan
In addition to the usual mortgage loan application requirements, such as proof of income, proof of assets and credit reports, the 203(k) loan application requires the following:
You don't have to hire professionals to do the repairs, but the FHA says that "if the borrower wants to do any work or be the general contractor, they must be qualified to do the work, and do it in a timely and workmanlike manner" and "a borrower doing their own work can only be paid for the cost of the materials. Monies saved can be allocated to cost overruns or additional improvements."
However, you can't overlook labor costs in the proposal. According to the FHA, "home buyers doing their own work cannot eliminate the cost estimate for labor, because if they cannot complete the work there must be sufficient money in the escrow account to get a subcontractor to do the work."
Some people choose to hire a specialist called a 203(k) consultant to help them complete all the extra paperwork required for this type of loan, such as preparing architectural exhibits. The fee to hire such a consultant can be included in the mortgage, provided it does not exceed limits established by HUD. For example, for a home requiring $15,001 to $30,000 of repairs, HUD does not expect the consultant to charge more than $600. However, it is perfectly acceptable to complete all the paperwork yourself, though you'll probably want some input from your potential contractors.
Completing the Rehab
Once you complete the purchase and the home is yours, you can start the repairs and remodeling. The FHA require all repairs to be completed within six months, although lenders can require a shorter time frame.
You'll begin making mortgage payments right away, like you would on any home. After all, you own it - it doesn't matter if you're living in it yet. However, as mentioned earlier, you can finance your first few mortgage payments. The rehab and repair money is placed in an escrow account and released as the work is completed and inspected to ensure HUD approval. HUD must also approve the finished product once all work has been completed.
Problems to Avoid
Many lenders don't do FHA 203(k) loans, whether because they don't know how or don't want to do the extra paperwork. Working with a lender who isn't experienced with FHA 203(k) loans is something you should avoid - the process is complex enough as it is. Don't give yourself any headaches by working with someone who doesn't know what they're doing.
Also, make sure you don't over-invest in the home - don't spend so much on repairs and improvements that you won't be able to recoup your costs if you sell the house one day. Look at the average sale prices of move-in ready homes in your neighborhood and try to put your home within this range. You don't want to own a $300,000 home in a neighborhood of $200,000 homes, because most people who can afford a $300,000 home will want to live in a nicer neighborhood where all the homes are comparably valued.
FHA 203(k) loans have a longer closing period. These loans usually take 60 to 90 days to close, which is longer than the 30 to 45 days that are common for other types of loans, including regular FHA loans. If you're in a hurry to move, this is not the loan product for you. You can also expect to pay a higher interest rate because of the increased risk associated with home-improvement loans.
These loans are also more work for lender and require specialized loan knowledge, so it can be harder to find a lender that will work with you. The application and renovation processes are lots of work for the homeowner, and there is lots of red tape involved. Some borrowers have reported delays in receiving their rehab funds, which adds additional stress to the process.
Though it can be more work to find a lender who does FHA 203(k) loans, and to complete both the application and renovation processes, the extra effort can pay off. This loan product can enable you to buy that perfect house and give it the TLC it needs. It can also make it possible for you to make the leap from renting to home ownership, since there might be a fixer-upper out there in your price range when there aren't any move-in ready homes out there that you can afford.
Original story - The FHA 203(k) Loan: A Home Repair Loan And Mortgage All In One