FHA 203k LoansThe Federal Housing Administration, otherwise known as the FHA, is a government agency created to help alleviate the homelessness case in the country. The office is under the authority of the Department of Housing and Urban Development (HUD), set up in 1934 after the Great Depression. The primary purpose of establishing the FHA is to oversee different insurance programs for single-family mortgages, insuring mortgage loans provided by HUD-approved lending institutions. Buyers are required to have a satisfactory credit rating and make a down payment to get an FHA loan.
What is unique about FHA 203K Home Loans?The FHA 203k mortgage loan is one of the many unique loan programs provided to make home acquisition easy, especially for homes that need repairs. The investment is also designed to finance necessary repairs to an existing home, covering the cost of the repairs and mortgage in one loan.
Otherwise referred to as rehab loans, the FHA 203k home loans are primarily loan products for rehabilitation and repair of single-family homes. The home loan program is targeted to serve individual homeowners and not commercial builders or investors.
One of the requirements of getting the FHA 203k loan is a down payment that can be as low as 3.5%, considered one of the major attractions of the mortgage loan, primarily to lower and moderate-income families. While local government entities and non-profits can be part of the loan program as borrowers, the resulting buildings must serve as primary, private residence.
While the mortgage is primarily made to serve the purpose of home improvement, they are sometimes used as a fundamental tool for local communities and neighborhood across the country for their revitalization efforts.
One of the primary goals of both the FHA and HUD is to increase the opportunities of owning homes across the country, in addition to preventing a house that needs repairs from abandonment by the dwellers.
The FHA 203k renovation loan, therefore, serves the purpose of improvements, repairs, and general rehabilitation of existing homes in the following ways:
- The building and the land that hosts it can be bought and rehabilitated. One-to-four family homes like townhomes, detached and single-family houses are eligible. One-to-four condominium units are suitable for interior improvements and repairs only.
- An existing home or dwelling or a modular unit on a particular site can be moved to another location. It is, however, required that a new foundation is provided and meticulously inspected, in addition to securing the dwelling properly to the said foundation.
Borrower Eligibility for the FHA Rehab LoansThe requirements for taking the 203k loan are not any different from other loan programs offered by the Federal Housing Administration. The qualification requirements are practically the same, and all you need is to meet the standard FHA credit qualifications which include the down payment requirements and mortgage insurance payment – upfront and annual, which depend on the value of the loan. Some of the standard FHA underwriting guidelines that apply include income, credit scores, employment verification and debt.
The significant difference that can be spotted in the standard FHA underwriting process compared to the FHA 203K underwriting process is that with the former, there is the general inspection that checks livability and an appraisal to assess the market value of the property. With the FHA 203K underwriting process, however, it does not make too much sense to find the fair market value of a property that needs repairs.
With the 203k loan, there is an ‘upon completion’ appraisal. This means that the appraiser looks at the current structure of the home and the documents outlining the repairs that need to be done on the property. The Appraiser subsequently creates an estimate of the final fair market value of the property after the renovations are completed.
Coverage of the 203K Loans
- The loans cover a broad range of home improvements as stated below.
- The installation of energy-efficient windows and doors.
- A porch, patio, and deck addition.
- Carports and garages.
- Lead paint removal.
- The addition of extra rooms like bedrooms, bathrooms and living rooms.
- Remodeling of bathroom and kitchen.
- Treatment of floor and flooring
- Landscape work and home improvements to enhance home value.
- Septic system addition.
- The addition of accessibility tool for a disabled person.
- Plumbing, heating, air conditioning and electrical wiring improvements.
- The repair of termite damage, structural problems, and chimney repairs.
There is no doubt that many homeowners love the FHA 203K loans, but besides being perfect for home improvements, the many benefits of the home loans do not come for free, and some of the drawbacks and merits of the loans are highlighted below.
- Cost – Depending on how you look at it, 203(k) loans can be affordable or not. You are required to pay an up-front mortgage insurance premium, otherwise known as MIP. It is also necessary that you pay a MIP fee with every monthly payment. Some lenders also charge a supplemental origination fee, which is the greater of 1.5% or $350. It is important to get quotes from different sources and look at various loan types before making a decision.
- Paperwork – One of the drawbacks of the FHA loans is the notorious paperwork involved. There are many forms to fill out. Your contractors also have to go through this relatively arduous process. You might, therefore, have to consider other options if you are not patient to go through this process.
- Required Standards – While you might have some home improvement ideas to implement, there are some FHA requirements you have to deal with, which include health and safety issues, in addition to meeting building codes. You should also expect to have some items like electrical problems and lead paint, added to your project list without your notice.
- Time – As mentioned earlier, there is a lot of paperwork that goes with the FHA loans. This means that a lot of time will be spent applying for the loans, especially for 203(k) loans. They take longer to close compared to 203(b) home loans. Since there will be third parties involved, e.g., the contractor, etc., everything has to be FHA approved before final approval or before releasing of funds.