Residential housing markets can be flooded with great deals on homes that fit any home buyers desires, but some of those deals are so sweet because the house needs substantial upgrades. If you find that perfect location, amazing lot space and home with an abundance of potential it can be dejecting to be denied a conventional loan because the home inspection comes back with fixes that need to be made before a lender will sign off on the loan. Fortunately, there’s an alternative to conventional loans that can purchase the house and fund any required improvements that need to be made. If you’ve found that perfect home that needs some tender loving care to be brought to life then consider applying for a Federal Housing Authority (FHA) 203(k) loan.
203(k) Loan Types
As stated above, FHA 203(k) loans are designed to help individuals cover home improvements necessary to bring a house up to livable standards. The loan is not provided by the FHA, the designation means that the loan is insured by the FHA to enable homebuyers or owners to finance a house and the necessary improvements all rolled into one loan. FHA qualified lenders will actually handle the loan itself, in accordance with Housing and Urban Development (HUD) Department rules. To accomplish these loans there are two types that the FHA authorizes:
- The Standard (K) Program
- The Streamline (K) Program
This program was developed to cover major repairs, additions and structural changes. Under this program, up to 110% of the value after improvements are completed, according to the appraisal, can be borrowed. Before lending can be authorized a 203(k) consultant is required to perform an inspection and the loan must include a minimum of $5,000 specifically for repairs.
This option is used for mostly cosmetic repairs or common improvements totalling less than $35,000. As with the standard program, a $5,000 minimum amount is required to be borrowed, but there is no requirement to have a consultant or engineer inspect the home.
Qualifications for a 203(k) Loan
The first requirements for the loan are that the applicant must intend to make the home their primary residence unless it’s a nonprofit organization conducting the repairs. Next, the repairs being provided for with the loan must be completed within 6 months of having the loan issued. Only FHA qualified lenders can provide this type of loan, so after you’ve found the property then contacting a qualified lender to help you with the process is the next step. You can search with the HUD department’s website to find lenders near you for the loan you need. After you find a lender then you need to create a list of all the repairs that you intend to have completed on the house. That list of repairs can also help you narrow down which loan program is best for you, the standard or the streamline. As a helpful guide, here are the improvements that qualify under the streamline program:
- Purchase of new appliances
- Plumbing repairs
- Electrical repairs
- Heating Ventilation and Air Conditioning (HVAC) replacement
- Flooring replacement or upgrades
- Gutters and Downspouts
- New windows
- New doors
- Energy Star or other energy efficient improvements
- Kitchen and bathroom remodeling (no structural changes)
- Painting or other wall treatments for both interior and exterior
- Weather stripping
- Disability access improvement
- Lead paint removal or stabilization
- Porches, patios and decks
- Basement finishing
- Wells and septic system repair or replacement
For any major repairs beyond those listed above then the standard program will be what is needed. Once you’ve decided which program is best suited for your needs then you’ll need to meet the lender’s requirements for them to approve the loan. Usually those requirements consist of minimum credit scores, satisfactory proof of income and your debt-to-income ratio. When the loan is approved, at closing the previous owner or lienholder will be paid, then an escrow account with the new lender will be created to hold the improvement funding. From there then the contractor or you can get started on the work. All of the work must be done to local building codes, meet safety and security requirements, and have all necessary permits issued before work is started. As work is completed, or at designated checkpoints, the contractor reports the work that has been completed to date, and the lender then orders an inspection to ensure the work meets the necessary standards. When the work passes the inspection satisfactorily then the lender releases payment for the work from the escrow account. That continues until all of the remodeling and renovating work is completed.
If this sounds like what you need to purchase that run down home you’ve been looking at to fix it up for yourself, then it’s worth the time to talk to us at Union Home Mortgage. We will assist you getting the process started.