THE FHA 203K REHABILITATION LOAN –
WHAT YOU NEED TO KNOW TO USE THIS PROGRAM:
WHAT IS AN FHA 203K HOME LOAN?
The FHA 203k rehabilitation loan is a home loan that is BOTH a home loan (backed by HUD/FHA) and a loan that allows you to finance repairs or renovations into the loan. This can be accomplished in one loan program because the lender is managing both the loan and the repairs at the same time.
This article is for real estate agents and consumers to better understand the 203k program requirements, the 203k loan process, and the benefits/risks of this program. I am sure you will have questions, I am here to help if you need anything!
WHEN DO I RECOMMEND A 203K LOAN?
(1) When a property is being sold “as-is” typically from the bank as a REO or short sale, and is required to sell without repairs. The property must be purchased “as is” (due to the seller or market) and would not pass the appraisal inspection for conventional financing or a regular FHA financing; and a cash purchase or 203k loan is the only option.
(2) Most homebuyers simply do not have the additional money on top of their down payment to put the repairs or upgrades into the home. Or in 2017 terms – “To buy a fixer-upper”.
203K HOME LOAN ELIGIBILITY:
As I mentioned earlier, the 203k loan is essentially an FHA loan. So, FHA qualifying guidelines (with a couple additional requirements) apply:
(1) Must be owner-occupied (cannot be used on a flip or investment home)
(2) Minimum 620 credit score (can make case-by-case exceptions down to 580)
(3) Minimum down payment of 3.5%
(4) FHA mortgage insurance is required (monthly .85% w/ 1.75% upfront MI premium fee)
(5) Can be used on a multi-family home (duplex, triplex…)
(6) FHA county loan limits apply (max loan amount $741,750 King/Snohomish/Pierce County)
(7) Seller can pay up to 6% closing costs
(8) You can borrower up to 110% of the future appraised value
(9) Gift funds allowed for down payment and closing costs
(10) No manufactured homes allowed
HOW TO WRITE YOUR 203K OFFER (IMPORTANT-REAL ESTATE AGENTS):
One of the most common mistakes (misunderstandings) is how to write your offer and structure the repairs **INTO** the transaction. Here’s a short overview:
* Purchase Price: $400,000
* Renovation Costs: $35,000
* Offer Amount On Purchase & Sale: $435,000
* Down Payment: $15,225 (3.5% down against $435,000 not $400,000)
WHAT REPAIRS CAN I DO WITH A 203K LOAN:
There are 2 types of FHA renovation loans: The streamline version and the standard. Today, we are talking about the “streamline” version. This option is the most common and allows you to perform minor work repairs up to $35,000. If you need more money for renovations, then the “Standard” 203k loan may be a better option (additional info and overlays may apply).
The allowable repairs for the “streamline” program are:
* Energy-efficient upgrades
* Roof replacement
* Carpet and flooring
* Repairing health and safety issues
* Kitchen and bathroom remodels
* And more…
Please note: The limit to costs is $35,000 for the streamline 203k loan program. However, FHA requires a buffer equal to 15% of the bids. This “buffer” is to create a contingency fund to cover overages that you may encounter with a contractor. If the contractor remains on task with the bids, then you get a refund of the 15% buffer. So with the 15% buffer factored in, the “real” maximum amount of repairs that you can finance is $31,000 (not $35,000).
THE 203K LOAN PROCESS
(1) Apply for a FHA 203k loan – Apply Here
(2) Complete 203k intro packet/meeting with Dan
(3) Get underwritten approved
(4) Find a contractor w/ FHA 203k experience (must be licensed, bonded, insured)
(5) Get bids, submit to Dan and Team
(6) Order the appraisal (a “subject to” appraisal is made)
(7) Close the loan (you get keys!)
(8) Complete repairs (within 6-months)
(9) Move in! (entire process can take up to 60-days, 45-days is common)
If you are a Real Estate broker, I am happy to show you how this program can add tremendous value to your business. If you are a consumer, let’s connect and talk about your goals as well as your options. There are other renovation programs in addition to the FHA 203k loan.
As with anything, it is important that you are working with a professional. Let my Team and I walk you through this process. It can be stressful and take longer than conventional financing, but education and communication is key!
To apply for a Home Loan, visit my Mortgage Concierge Page and follow steps one and two.
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