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 many lenders won't make rehab loans. Some won't fund equity loans at closing, especially if there is no equity.
A Streamlined 203K loan is figured into the original loan balance, resulting in one loan.
It can be an adjustable-rate or fixed-rate mortgage. 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 or home inspector can put together a list of recommended repairs / improvements.
Eligible Repairs & Improvements
The Streamlined 203K loan allows for simple repairs that can be easily estimated and completed. Many are considered light cosmetic repairs, but some will require hiring a licensed contractor if it falls out of the borrower's area of expertise. Here is an approved list of repairs / improvements from HUD:
Roofs, gutters and downspouts
HVAC systems (heating, venting and air conditioning)
Plumbing and electrical
Minor kitchen and bath remodels
Flooring: carpet, tile, wood, etc.
Interior and exterior painting
New windows and doors
Weather stripping & insulation
Improvements for persons with disabilities
Energy efficient improvements
Stabilizing or removing lead-based paint
Decks, patios, porches
Basement completion and waterproofing
Septic or well systems
Purchase of new kitchen appliances or washer / dryer
Special Conditions & Terms
No minimum loan balance required.
Borrowers must occupy the property.
Property cannot be vacant for more than 30 days.
Work must be completed within six months.
Work must be professional.
If job requires a permit, borrowers must get a permit and a sign-off.
Work must commence within 30 days from closing.
Repairs Not Permitted
Landscaping or yard work
Moving a load-bearing wall
Room additions or add-ons to the home
Fixing structural damage
Requirements to Perform the Work
Borrowers can select among licensed contractors.
The lender will review the contractor's experience, background and referrals.
The lender will want a copy of the contractor's estimate and the agreement between the contractor and borrower.
Borrowers can also arrange to do some or all of the work under a "self help" arrangement.
Do-it-yourself projects require providing the lender with documentation supporting the borrower's knowledge, experience and ability to perform the necessary work.
Disbursement of Payments
Maximum of two payments to each contractor, including the borrower, providing the borrower works under a "self help" plan.
No more than a 50% advance is allowed.
Do-it-yourself allowances do not include labor; only materials costs are allowed.
Final payment is paid after submission of evidence of payment to sub-contractors / suppliers or other possible lien claimants.
How to Qualify for an FHA 203K Loan?
1. Find a Realtor who is willing to take you through this process. It is a difficult way to buy, so you need to have an agent with some patience, calm and reserve.
2. Find a loan officer who is certified in doing FHA 203K loans. Not all lenders handle them, and only a few loan officers are trained to deal with them. You have to select a lending institution that is large enough to have staff trained for this loan process and capable of doing all the paperwork. Smaller lenders cannot handle this process.
3. Find the house. The loan program is designed to help pay for major repairs needed, such as roofs, siding, mechanicals and electrical boxes. However, you can get funds to do some upgrading and remodeling of the house as well. There are many excellent fixer-uppers out there that would be great candidates for this program.
4. Once your offer is accepted, you will need to start getting bids on the work that you want to have done. Some of the work can be done before closing---especially if it is essential to making the house habitable. Other work can be paid for after closing with funds held back or held in "escrow" by the lender. Many times, the lender will want to escrow more funds than necessary to ensure that everything is paid.
What Else to Expect
When you get your loan, an appraiser will make a determination of the value of the property in its present condition and in its future finished condition. Appraisals basically involve the appraiser looking at comparable sold properties in the area to determine a value for your property. The appraiser looks at a severely distressed property as being under construction, with the anticipated finished house being almost like new.
There may be a few variations in your particular FHA 203K Loan scenario, but this should give you a general idea of how to get started and what to expect along the way.
For more information give us a call 786-704-8482