How To Rehab Your Home With Your Mortgage InsuranceThe idea of taking on a fixer upper might seem like a nightmare to some peoplewhat with the work, time, money, and stress that can go into it. But, there are others out there who would be eager and determined to take on the challenge of transforming an old, lackluster house into the home of their dreams. Unfortunately, even if you can afford the rehab costs, getting approved for a loan can be difficult. Why? Because most lenders arent willing to risk taking on neglected, uninhabitable properties. Luckily, the Federal Housing Administration (FHA) has rectified the problem by introducing the 203(k) mortgage program to help buyers who want to purchase and rehab run-down houses, or homeowners wanting to refinance and renovate their current home. If youre interested in taking advantage of the FHA 203(k) loan, here is a short guide with all the facts you need to know. SEE ALSO: FHA Attempting To Aid Distressed Homeowners
What Is A FHA 203(k) Loan?For buyers, the FHA 203(k) loan covers the acquisition of the home as well as the associated repairs and upgrades. For homeowners, a portion of the loan is used to pay off the existing mortgage, and the remaining funds are used to cover the rehabilitation expenses. Also, since the program is backed by the federal government, the loan is insured. This minimizes the lenders risk, offering security in case the borrower defaults on the loan. However, the loan amount cannot exceed the FHA mortgage limit for the area. This is determined from either the value of the home before the rehab plus the cost of rehab, or 110 percent of the appraised value of the home after the work is done, whichever value is less. The rehabilitation cost must also be at least $5,000 to be approved. This cost includes:
materials labor permits inspection architectural and engineering fees a small reserve for unexpected expensesAdditionally, borrowers can request up to six months of mortgage payments to offset the cost of living if they cannot live in the home while renovations are taking place.
Types Of Loans AvailableThe FHA offers three different types of 203(k) loan programs. The primary 203(k) mortgage is for the rehab and repair of any single family dwelling, as long as the rehabilitation costs exceed $5,000. The Streamlined 203(k) is an option for less extensive projects, only financing about $35,000 for mortgage, improvements and repairs. This is ideal for homeowners who want to make upgrades and repairs to their home before they sell, or buyers wanting to update the kitchen or baths before moving in. The PowerSaver Pilot 203(k) is a new program for homeowners who need financing when making low-cost, energy saving upgrades to their home renovation project. These improvements must be approved by the lender, and the minimum cost of upgrades must be at least $3,500. However, this program is set to expire May 4, 2015.
What It CoversAccording to the guidelines set forth by the U.S. Department of Housing and Urban Development, the following improvements are acceptable under the 203(k) program:
alterations and reconstruction to the structure of the home up to date improvements to the homes function elimination of health and safety hazards curb appeal updating or replacing the plumbing installing a well or septic system adding or replacing roofing, gutter, and downspouts adding or replacing floors or floor treatments landscaping and site improvements enhancing accessibility for a disabled person energy-conservation improvementsThese improvements must also adhere to basic energy efficiency, structural guidelines, and local codes.