If you plan to buy a property that may require additional financing for the sake of doing renovation work or improvements, then a FHA 203K loan is the best option. The financing needed for the purchase and the repairs can be closed through one single loan. This leads to significant savings on closing costs.
A 203K loan can be availed for both purchasing and refinancing of eligible residential properties. There is also a streamlined version of the loan for projects that have limited repairs and have a estimated cost less than or equal to $35,000.
With the standard 203K mortgage program, you can do major repairs such as those that may disallow your continued stay at the premises while the repairs are being done. While there is no loan limit for the 203K streamline program, there is a minimum loan amount of $5,000.
Only owner-occupied residential homes with no more than four units qualify for FHA 203K. The loan's guidelines allow for conversion of a home with more than four units to 4 units or lesser. Similarly a home with fewer than four units can be converted to have up to 4 units.
As far as loan limits are concerned, the standard FHA limits apply. In high cost areas such as New York, you can borrow up to the FHA max loan limit of $625,000. The low down payment and flexible credit requirements that are a standard feature of FHA loans, also apply.
1. The loan is insured, to the lender, so if you default, the lender still gets his money form FHA. This comes at a very high cost to you. I think it is 3% of the value of the loan. Add to that monthly premiums for the same.
2. You have to spend alot of money on consultations and appraisals -- part of the processing. The fees for the loan itself are also very high.
3. Interest rates are about 1% higher thank banks, even with 2.5% points.
4. Most fees are based on percentages of the total loan amount -- so it is in the interest of everyone in the process to lend you more than you need. Add to that the 15% reserve, which you pay interest on while you are doing construction (but they pay you back interest at a much lower rate for keeping the money with them).
As for my personal experience, I paid $18,000 closing, only $6,500 went toward a down payment; $5,500 for prepaid points, $6,000 covered "other" fees -- add to all of that $2,000 in consultations and preparations.
I know what yo are thinking, but I got turned down by my bank because the house needed extensive repairs. So basically, I paid a total of $13,500 for a %185,000 loan.
Is there rules/regulations that state in the 203k loan that we have to use a contractor for all the work? Do we have to use the same contractor that provided us with the bid?
The 203k loan is fantastic program in my opinon.
FHA 203(k) Renovation Loan:
An important tool for community and neighborhood revitalization, the FHA 203(k) loan offers flexible qualifying and low down payments:
FHA down payment (3%)
Flexible credit qualifying
Finance up to 6 months of mortgage payments
Purchase or Refinance and Improve all in one loan
The 203(k) loan program offers borrowers the resources to rehabilitate a home that may be in need of repair, either the home that they currently live in, or a fixer-upper. One single loan is used to pay for the purchase (or refinance) and the cost of renovating the home.
. The FHA 203(k) loan is available to borrowers of all income levels, to homeowners who plan to OCCUPY the house, and the home is 1 to 4 units.
203K Eligible Borrowers:
Owner Occupants - Purchase - Refinance
Single family dwellings
Mixed Use (Storefront)
1-4 Unit buildings- This loan can be used to increase or decrease the number of units.( For example if you have a 2 family building that you want to convert to a large one family, the costs involved can be part of the loan. )
Structural Alteration and Reconstruction:
Elimination of health/safety hazards
Changes for cosmetic appeal
Plumbing, heating air conditioning, and electrical upgrades
Well and/or septic repairs
Roofing, gutters and downspouts
Flooring, tiling and carpeting
Energy conservation improvements
Access for the disabled
Appraisal: The loan to value (also known as LTV ) is based on estimated value after agreed upon repairs are completed.)
The appraiser will be given a copy of your â€œwork-write upâ€ to estimate an after improved value for your new home or current home. The loan given is against that improved value giving you credit for the work to be performed.Other Eligible Costs:
(THESE COSTS MAY BE FINANCED INTO THE MORTGAGE LOAN)
Contingency reserve (10%-20%) ( What is a contingency reserve-Most mortgages for purchase-renovation require an additional 10 percent of the total cost of the project to be put aside into a reserve account. This contingency reserve is only used when unforeseen repairs or costs are found during renovation.)
Up to 6 months PITI (Principal ,Interest ,Taxes and Insurance)mortgage payments
Inspection and title update fees
Architectural & Engineering fees (if needed)
What Steps Do you need to take to Buy a House Using FHA 203(k) Renovation Loan.
As with any Prospective Purchase Your First Step should be to speak to a Mortgage Professional
Locate the home you want and submit a contract for purchase - contingent on a home inspection.
After your contract is signed, schedule a home inspection with a 203(k) cost consultant to budget your renovation.
If you approve the budget, the 203(k) cost consultant will prepare the work write up for the appraiser and lender, and will prepare three contractor bid packages for you.
You can now bid your job to general contractors, or multiple sub-contractors.
Appraiser uses work write-up to value home as if all work is completed.
Loan closing (30 to 45 days average).
Within 30 days of closing start project with general contractor, or multiple sub-contractors.
Please feel to contact me if you have any question or are looking to Purchase a Rehab. Home.