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The 411 on the FHA’s 203k Loan Program

411 on the FHA 203K Loan Program

As the inventory of new and existing homes for sale tightens, you can find yourself looking at too many properties within your price range that do not meet your criteria or fighting the urge to step up into a higher price range in hopes of finding the perfect home. Meanwhile, you may have noticed that there are homes languishing on the MLS that seem well priced but are in serious need of updating.

These “ugly ducklings” might warrant a closer look. In many cases, a little renovation could get you exactly what you are looking for—even your favorite shade of flooring. Better yet, there are special loans available that can help you can make it happen.

The Basics

The FHA 203k loan goes by various names—the renovation loan, the rehab loan, the home improvement loan, all of which describe its purpose—and helps you pay to bring an older home in need of some TLC back up to market standards. Backed by the Federal Housing Administration (FHA) and funded only by 203k mortgage lenders, the loan combines a purchase mortgage with an additional amount to cover repairs and renovations.

These loans are only available for owner-occupied homes—not investment properties—and can carry higher rates than a conventional mortgage. However, they do offer low down payments—3.5 percent—and can accommodate credit scores as low as 640.

Two Varieties

Rehab loans come in two flavors. There is a streamlined or limited version, which provides financing for more cosmetic changes. It limits the amount being financed for repairs to no more than $35,000.

The second type is the standard or traditional loan, which has a minimum of $5,000 and no maximum repair limit, though the entire loan must be below the FHA’s maximum amount for the region. This loan is intended for major renovations and repairs of a home. Closing on the loan will take a little longer since you will need to provide project estimates to your Loan Officer for approval; these loans will not cover DIY repairs. As with other FHA loans, you will pay a monthly mortgage insurance premium.

Refinancing to Refresh Your Current Home

While 203k loans are often associated with a new home purchase, homeowners who aren’t finding what they want on the market and who would like to make adjustments to their current homes can refinance from their current mortgage—whether it is an FHA mortgage or not—and into a 203k loan.

Pursuing this option provides cash for renovations and, in some cases, may provide a more attractive source of funding than a home equity line of credit, home equity loan, or a personal loan would.

In the end, this approach will take more time and planning since your lender will be tracking and verifying every change and repair you make. However, the end result will be a house that has everything you want in a home, literally. You also will have created some added home equity while you were at it.

What A 203k Loan Can Do For You

STREAMLINED VERSION

Excludes structural changes

STANDARD VERSION

Includes everything under the streamlined version, as well as structural changes

  • Remodel bathrooms and kitchens
  • Replace appliances and heating and cooling elements
  • Update the carpet and flooring
  • Replace the roof, gutters, and downspouts
  • Waterproof the basement
  • Repair, replace, or add outdoor decks and patios
  • Replace windows and doors
  • Paint
  • Address safety and health issues (such as mold or lead paint)
  • Improve accessibility for the disabled
  • Make energy-efficient improvements
  • Relocate walls
  • Add a room
  • Make structural repairs
  • Convert a multifamily home into a single-family home (or the reverse)
  • Landscape the property
  • Connect to a sewer or water system

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