Did you know that the Federal Housing Administration (FHA) insures more than mortgages? One important program is the FHA 203(k) that is an FHA-insured loan that gives homebuyers and homeowners the opportunity to renovate or repair their primary residence and roll the loan into a FHA insured mortgage.
Getting these loans requires you to work with an experienced FHA lender like Prospect Mortgage. The down payment of a FHA 203(k) loan can be as low as 3.5 percent of the total cost of rehabilitation.
When you buy a home, there is almost always some type of renovation work you want, but financing a construction loan on top of a mortgage is a hassle as you make two applications and have two closings—and may need more than the low down payment and mortgage rates available through FHA insured loans. But, with a FHA 203(k) loan there is one application and one closing. Less hassle a low down payment, one monthly payment and a competitive rate make this an excellent choice for a first time buyer or for refinancing an existing loan to a FHA 203(k) and mortgage.
Another excellent feature of a FHA 203(k) loan is the ability to include up to six months of mortgage payments which allows borrowers the opportunity to avoid paying twice for housing when renovations are so extensive that you need temporary housing while they are being done.
Two Kinds of 203(k) Loans
There are two kinds of FHA 203(k) loans,
- Streamlined; and
Streamlined loan — is designed for homes that do not have structural or foundation issues. The proposed improvements can be no more than $35,000. Eligible projects for a streamlined loan include,
- Painting (interior and/or exterior);
- Window and door replacement;
- Roof, gutter and downspout replacement or repairs; and
- Kitchen remodeling excluding structural repairs
Projects ineligible for a streamlined loan include,
- New construction, such as a room addition;
- Repairs of structural damage;
- Major rehabilitation/remodeling; and
- Amenities (landscaping and such)
Many of the projects ineligible for a streamlined loan may be eligible for a standard or Consultant 203(k) loan.
Consultant Loan — sometimes called a Standard FHA 203(k); covers many projects that are excluded from a streamlined loan. Allowed projects include,
- Structural improvements to a residence
- Garage that is attached or detached from the home, includes new garage construction
- Complete bathroom or kitchen remodel
- Permanent improvements to your home
Projects that cannot be done using the 203(k) Consultant process include,
- Pools and tennis courts;
- Bathhouse or gazebo; and
- Renovations or additions for business use
The consultant loan makes your FHA lender have a larger role than with a streamlined loan.
A first site visit — to decide the feasibility of a Standard FHA 203(k) loan. If the project is deemed possible, the buyer pays the consultant a retainer and signs a formal agreement with the consultant.
Preparation of loan documents — including scope and specifications accompanying architectural renderings and a copious cost breakdown. Your FHA lender then organizes and writes lender and contractor bid documents that contain all the preceding items mentioned just above that is given to the lender, borrower and contractor.
Contractor selection — it is best to work with a contractor familiar with 203(k) financing. Often, lenders have lists of pre-screened contractors. Check with your FHA lender for help with contractor selection.