Home Improvement Loans Overview
Whether you're buying a home that needs to be completely renovated or simply updating certain areas, the FHA 203k loan allows you to combine your renovation costs into your mortgage so there is one loan with one closing. The amount borrowed is a combination of the cost of the home and the estimated price of the repairs, including the labor expenses. This type of loan is backed by the Federal Housing Administration, but you don't need to have an FHA home loan to qualify for a FHA 203k refinance loan.
What is an FHA 203k Home Improvement Refinance Loan?
If you need to refinance your home mortgage, the FHA 203k Refinance Loan allows current homeowners the opportunity to rehabilitate and improve their home. Whether it is making a home handicapped-accessible, replacing your roof or upgrading your kitchen, home improvement projects can raise the value of the property and allow you to customize as your needs change.
The FHA 203k Refinance Loan allows you up to $35,000 for your home improvement project, and the mortgage balance can exceed the current appraised value of the home.
FHA 203k Home Improvement Loans
For many people, buying distressed or dilapidated homes can become a lucrative investment in homeownership. However, home repair and renovations can be costly. With an FHA 203k Home Improvement Loan, you can have a single fixed-rate mortgage and up to $35,000 for improvements.
Home Improvement Loan Benefits
A 203k home renovation loan is a great option for borrowers who want to finance home improvement expenses.
- Buy a fixer upper: Finance an older home that needs significant remodeling
- Get more options: Buy a home that you may not otherwise have been able to afford to repair
- By combining your construction costs with your mortgage, you limit your closing costs and simplify the renovation process.
- You can get up to $35,000 for improvements and the mortgage balance can exceed the appraised value of the home if guidelines are met.
FHA 203k Loan Requirements
Here are some types of projects eligible for an FHA 203k Loan:
- Removal of lead-based paint
- Decks, patios, porches
- HVAC systems (heating and air conditioning)
- Basement completion
- Basement waterproofing
- Updates to a septic or well system
- New kitchen appliances
- Washer and dryer upgrades
- Roofs, gutters, and downspouts
- Plumbing and electrical upgrades
- Minor kitchen or bathroom remodeling
- Installing carpet, tile, or wood flooring
- Restoring windows or doors
- Weather stripping and insulation upgrades
- Disability improvements
- Energy efficient upgrades
- New siding
- Building a home addition
Types of properties that qualify:
- A one-to-four family home that has been complete for at least a year
- A home that has been torn down as long as some of the existing foundation still remains
- A home that may need to be moved to a new location
- Some condos
Your home improvement project will need to be completed within six months, and the funds will be put in an escrow account to be paid out to the contractors upon completion. The improvements or upgrades will also need to be performed by professionally licensed contractors.
On top of being FHA-approved, applicants for an FHA 203k loan will need to meet minimum credit score and employment history requirements. Bankruptcies have a two-year seasoning requirement from discharge and foreclosures require 3 years of seasoning. Generally, a two year history of income documentation is required to meet FHA requirements.
FHA 203k Loan Options
There are two types of 203k Loans:
- Limited FHA 203k: The Limited 203k loan is intended for less expensive projects that don’t involve structural improvements. It has a maximum repair limit of $35,000.
- Standard 203k: The traditional 203k loan has a minimum requirement of $5000 in renovation costs and covers structural repairs. There is no maximum repair limit as long as the entire loan is below FHA’s maximum loan amount for the region.
The 203k loan is available as a fixed rate mortgage. Since there are different variables with each of these loans, it’s always a good idea to consult a 203k loan officer regarding your specific housing situation.
203k Loans: What to Watch For
Bear in mind that for an FHA 203k Home Improvement Loan, you will need to pay an up-front mortgage insurance premium and monthly mortgage insurance each month. You may also be charged a supplemental origination fee which could add another $350 or 1.5 percent, whichever is greater.
While you likely have your own ideas for areas of your property you wish to improve, the FHA requires you to meet all relevant building codes when it comes to health and safety. This could mean lead paint, electrical issues, or other issues that will need to be resolved in addition to any alterations you’d like to make.