In today’s real estate market with listing shortages and not enough new construction to go around, what’s a buyer to do? Consider a home that may need some work to make it fit your needs. With a renovation loan you can look beyond what exists to what can be. This opens up the world of older homes and foreclosures that might otherwise be over looked.
There are several types of renovation loans, but the most common is the FHA 203(K). A 203(K) Rehabilitation Mortgage Insurance Program loans allows borrowers to wrap the cost of repairs and improvements into their home financing. There are two types of 203(K) loans. The most common is known as a Streamline 203(K) and is restricted to repairs and improvements that total $35,000 or less. The second type applies to improvements costing more than $35,000.
A 203(K) loan requires a minimum of $5,000 to be spent on home rehabilitation and the total mortgage must fall within the FHA limit for the area. These limits vary across the country. The current limit in Harris County, Texas is $272,500.
While the 203(K) loan may be a great option for many homeowners there are some restrictions. For example, 203(K) loans can be used for refinancing as well as purchase loans, but they are limited to owner/occupants, so investors are not eligible. In addition a licensed contractor must be used for the work, which must begin within 30 days of closing and be completed within six months. Applicants will need to get three bids from contractors and have an evaluation by a HUD-approved cost consultant. An appraisal will be done on the as-is value of the home plus the improved value once the repairs are complete.
Certain types of projects may not be eligible for 203(K) financing. Major structural repairs may not be undertaken with a Streamline 203(K) such as putting on an addition or fixing a cracked foundation, but a buyer could fix a roof and do plumbing repairs. The full 203(K) allows almost any home improvement as long as it adds value to the home. Such projects may include structural additions or remodeling a kitchen. Items such as a swimming pool or hot tub cannot be financed with a 203(K), but high end materials like granite counters and stainless steel appliances are allowed.
To qualify for a 203(K) loan a buyer will need decent credit and like all FHA loans a 3.5 percent down payment (based on the total loan amount, including renovations). Interest rates on 203(K) loans are slightly higher than other FHA loans because there’s a greater risk for the lender that the repairs will not be completed.