Prospective homebuyers today have a significant amount of inventory available to them for review. Many markets are flooded with potential foreclosure or short sale purchases that are much more affordable than ever before. However, these homes may often need a full or partial renovation before they are deemed to be in the livable condition required to obtain a standard FHA, VA or Conventional mortgage loan. For those homebuyers, an FHA 203 (k) may be the right answer for you.
The Federal Housing Administration (FHA) administers the 203 (k) program as part of the Housing and Urban Development Agency (HUD). Buyers can utilize the program in one of three ways: purchase a property, that is resided in by the owner as an “owner occupied property”, as a refinance of existing balance of their current loan on the home they currently occupy while taking out funds to complete applicable repairs, or lastly to purchase a home on another site and move it onto a new foundation and rehabilitate it.
Unlike with standard loan programs, the 203 (k) Rehab loans allows one to qualify based on the future value of the home’s value AFTER the repairs are completed. This is especially vital in areas that a home is in dire need of repair and the other comparable homes support a higher appraised value. Such improvements on the right property can be a great investment for those looking to move to a new area, first-time homebuyers or those who have occupied a home for many years and need upgrades on their residence. For those who currently occupy the residence, most lenders will essentially allow you to “cash-out” the equity in a refinance for such improvements to 97.75% of the home’s equity whereas a typical loan program has limits in place to 80%. Homeowners unable to reside in the home while work is completed may be eligible to refinance up to 6 payments into the loan while the work is being completed. The eligibility for this program is quite similar for that of a standard FHA loan – meaning a limited or sometimes no down payment needed at all.
The program is extremely beneficial to many in today’s market. However, like everything it has its limitations. Applicable repairs are closely regulated, monitored, and inspected by the bank appraiser for quality and completion of work. Furthermore, repairs are required to be completed by an applicable General Contractor and not by any handyman. Home buyers must own the property and intend to reside in the home after repairs are completed. They must also work with HUD approved 203 (k) Consultant who meets with borrowers to coordinate their wants and needs. The Consultant also evaluates the property to determine which repairs are needed for HUD and Code requirements. The Consultant often acts as the liaison between the lender, client, appraiser and borrower and whose write up is used by the General Contractor to bid for the job. Rates for the program average about 35-50 basis points above a standard FHA 30 year loan rate, still making the program a must for many applicable homebuyers.
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