Friday, September 30, 2011

FHA 203K Loans Bring New Life to Old Homes

The Federal Housing Administration (FHA), which is part of the Department of Housing and Urban Development (HUD), offers many home loan programs to help foster American home ownership. Perhaps one of the most unique programs is the FHA 203K loan. This program is designed to help communities revitalize their neighborhoods by providing loans to rehabilitate, repair or modernize homes.

According to HUD, an FHA 203K loan can be used to rehabilitate or improve a one-to-four unit dwelling in one of the following three ways:

1) To purchase a piece of property and the land on which it is located and rehabilitate it.
2) To purchase a piece of property on another site and move it onto a new foundation on a mortgaged property and rehabilitate it.
3) To refinance existing liens on the property and rehabilitate it.
The maximum amount that one can borrow on an FHA 203K loan cannot exceed 110% of the home's value after the rehabilitation is complete. The minimum amount one can borrow is $5,000. Many homeowners find these loans so helpful because they can be used it for such a variety of improvements. A borrower can use it to completely rehabilitate an old home or remodel a bathroom, repair a chimney, improve flooring, build a skylight or even complete major landscape work!

When applying for an FHA 203k loan, one or two appraisals will be required. Some lenders will require an "As-Is" appraisal to be done before rehabilitation takes place. This initial appraisal will determine the current value of the home. However, some lenders may deem the "As-Is" appraisal not necessary and will use the contract sales price on a purchase transaction instead depending on when the property was purchased.

After the "As-Is" value is determined, the borrower must submit their planned repairs to the FHA. After these repairs are submitted, another appraisal called an "After Improved Value" appraisal will be done to determine the fair market value of the property once improvements are completed.

To obtain a correct "After Improved Value" appraisal, it's important to include all of the eligible expenses in the cost of the rehabilitation. Eligible expenses that can be included are: cost of materials, labor, contingency reserve, overhead and construction profit, up to 6 months of mortgage payments, permits, fees, inspection fees by a qualified home inspector, licenses and consultant and architectural/engineering fees. These expenses will help the lender determine the maximum mortgage amount that the borrower will receive. It's important to include all of the cost and expenses into the plan because this will help the lender determine how much money is really needed and allow them to correctly assess the necessary mortgage amount for the project.

Once the borrower receives the funds from the mortgage, repairs on the house must begin within 30 days after closing and be completed within six months of closing. An approved FHA official will verify that the project is complete and the borrower may begin enjoying their beautifully renovated home. Help bring new life into an old home with an FHA 203K loan!

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