by Dan Krell
If you’re like many homebuyers, you’re probably looking for a home that is “turnkey” or an updated home that is ready to move right in. However, since inventory is tight, competition can get intense. But rather than passing on the “diamond in the rough,” consider the FHA 203k.
The FHA 203k is HUD’s rehabilitation loan. The “203k” actually refers to the section within the National Housing Act that provides HUD with the ability “…to promote and facilitate the restoration and preservation of the Nation’s existing housing stock;” in other words provide mortgages to renovate and rehabilitate existing homes. Although the program is not allowed to provide for “luxury” upgrades (such as hot tubs), the program may be used “…to finance such items as painting, room additions, decks and other items…”
If you’re purchasing a home that is not a total rehab project, there is a streamlined version of the program that can assist you to purchase the home and provide additional funds (up to $35,000) for improvements and upgrades. The FHA 203k-streamline is a “limited loan program” designed to provide quicker access to funds so your home move-in ready relatively quickly.
The “203k” process is relatively straight forward. After identifying a home, you should consult your 203k lender and consultant about the feasibility of a FHA 203k. A project proposal is prepared detailing a cost estimate for each repair/improvement. During loan underwriting, the appraisal is completed to determine the value of the home after the proposed repairs/improvements are completed. If the mortgage is approved, the home is purchased with the loan and the remaining funds are placed in escrow to pay for the project.
Much like a typical mortgage, you must qualify for the program by meeting underwriting standards for borrowers. However, unlike the typical mortgage, additional underwriting requirements include review of architectural plans and repair estimates (materials and labor) from licensed contractors. HUD approved consultants/inspectors examine and evaluate the project’s progress to ensure work is completed and compliant with HUD standards. Funds for the repairs/renovations are released in draws to ensure the work is completed as intended as well as meeting all zoning, health and building codes.
Of course, the home must also meet eligibility guidelines. The home: must be one to four units; must be at least one year old; and must meet neighborhood zoning requirements. The program allows for major rehabilitation on homes that have been razed provided that the foundation still exists.
But what if you’ve decided to renovate your home rather than move? The FHA 203k allows for home owners to make renovations, updates, and sometimes additions. The possibilities seem endless (as long as your vision stays within the loan limits). Besides painting and updating kitchen and bathrooms, you could possibly even expand your existing house with an addition. The FHA 203k even allows for many “green” upgrades to make your home more efficient.
FHA guidelines have been revised in recent years, and may undergo further revisions. It is important for home buyers and others who are interested in the FHA 203k to consult with an approved FHA 203k lender for borrower and home qualifying guidelines, loan limits and 203k acceptable improvements. Additional information (including a list of 203k lenders) can be found on the HUD website (HUD.gov).
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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published the week of March 18, 2013. Using this article without permission is a violation of copyright laws. Copyright © 2013 Dan Krell.