Friday, September 28, 2012

The FHA 203(k) Rehabilitation Mortgage Insurance Program - The "Fixer-Upper" Loan

Under Section 203(k) of the National Housing Act, the Federal Housing Administration (FHA) offers mortgage insurance on loans issued by approved FHA lenders to help borrowers purchase and rehabilitate a home. The home should be one that the borrower plans to use as their primary residence. This same insurance program also covers cash-out refinance mortgage loans whose proceeds will be used by the borrower to rehabilitate their current home.
Why the "Fuss" About FHA 203(k) Loans?
Trying to buy a "fixer-upper" home and rehabilitate it can be a very complicated process for borrowers. It typically requires taking out multiple short-term loans with high interest rates. These loans often require a balloon payment when they become due.
The FHA created Section 203(k)-insured loans to address the needs of such borrowers wanting to rehabilitate new or existing homes. This program makes the process of buying and fixing up a new home much simpler by providing the borrower with one long-term mortgage loan that covers everything.
How Do Section 203(k) Loans Work?
There are several basic requirements for a home loan to be covered under Section 203(k). The home must be at least one year old, and the planned rehabilitation must cost a minimum of $5000. The property value of the home must fall within the FHA loan limits for that area of the country. FHA maximum loan limits differ for each county, borough, or county in the state where the property is located..
When a 203(k) loan is closed, some of the money goes to pay for the purchase or refinancing of the home. The remaining money is placed in an escrow account to pay for the work on the home. Funds from the escrow account are paid out as rehabilitation work is completed.
Work Covered By Section 203(k)
Many types of improvements can be covered under this program. They include but are not limited to: 
  • modernization of the home
  • correcting health or safety hazards
  • repairing or replacing plumbing
  • repairing or replacing electrical
  • repairing or replacing roofing
  • repairing or replacing floors and floor treatments
  • landscaping and other work to improve the appearance of the property
  • energy efficiency improvements
Other types of home improvements are covered. You will want to consult your lender to find out if your particular rehabilitation needs can be covered under the program.
Who Can Apply?
Anyone can apply for an FHA 203(k)-insured mortgage as long as they can afford the monthly house payment based on their debt-to-income (DTI) ratio. To apply simply contact and FHA-approved lender. Many services are available online where you can fill out a single form and get referred to multiple lenders allowing you to compare multiple rates and loan offers.

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Tuesday, September 25, 2012

Saturday, September 22, 2012

How to Get a Loan to Buy a Fixer Upper

How do you get a loan to buy a fixer-upper? This is a common question. One of the criticisms of conventional loan programs is that they require the property to be in excellent shape. The whole point of buying a fixer-upper is to get a great deal and make a profit on the fix up. And a lot of sellers want to sell in as-is condition, they don't want to carry out the work. This leaves the buyer in a catch-22 situation; he can't get a loan because the house is in too poor a shape and he can't fix up the house because he can't close. The 203k program is the Federal Housing Administration's (FHA) answer to the criticism. The 203k program allows for the purchase (or refinance) of a property, plus the cost of repairs and improvements. A bank or mortgage company makes the loan under the guidelines of the FHA. You will need to qualify for the loan in the usual way.

The process starts off with a detailed proposal that includes:
o The scope of work
o A cost estimate for each repair or improvement

The next step is to obtain an appraisal that determines the current value of the property and the value after the renovation.

When the loan is made it will include the purchase cost, the remodeling expenses and the closing costs. A contingency reserve is kept of between ten and twenty per cent of the anticipated remodeling costs. The contingency reserve is to cover any additional work necessary that is not in the original proposal.

At the closing the seller is paid and the remodeling funds are paid into an escrow account. The escrowed funds are paid to the contractor through draw requests for completed work. As the contractor completes and shows that the work is satisfactory he can request draws on the funds. (Ten per cent of each draw is held back until completion of the job). These funds are released once the lender determines that there are no liens against the property.

The mortgage payments and remodeling begin after closing. If you will not be able to occupy the property due to the construction up to six mortgage payments can be added into the cost of remodeling.

The 203k program makes it possible to purchase properties that the buyer might not otherwise be able to get a low down payment loan on. You can take advantage of this program to purchase a single or multi-family unit, fix it up and build substantial equity. All this with a low down payment, below market, FHA loan!

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Wednesday, September 19, 2012

Financing For Mixed Use Properties - 203k

Mike Young talks about how a 203k mortgage is a great way to find financing for a mixed use property. See more at

Sunday, September 16, 2012

FHA 203k Streamline - The Best Way to Purchase Fixer Upper Homes

Buying a home that is need of repair has always been a struggle. The lender wants the property to be in tip top shape before the loan can be finalized. The seller does not want to pay for repairs. But the buyer really wants the home and they can see the potential value with a little bit of work. What is a person to do? The FHA 203k loan is made for this exact type of scenario.

The streamline version of the FHA 203k was changed in 2005 to allow borrowers the flexibility to make small improvements as well as enhance the look through cosmetic features. The streamline version of 203k is different from the full 203k loan. The streamline version allows a person to buy a home and add up to $35,000 to cover these small repairs.

There are documentation requirements for getting the work approved by FHA. However, the home buyer is allowed to choose the contractor, the type of work being performed and the color, if appropriate. This essentially allows a prospective buyer to contact a reputable contractor, find a suitable home that needs only modest repairs, and get approved for the loan. The lender will need to qualify the buyer for the amount of the purchase price plus the maximum $35,000.

The purpose of having the contractor with you when you look at homes is to get an accurate estimate for the necessary adjustments. Repainting the walls, replacing the carpet, adding modern appliances and updating the roof are a few examples of the type of work that can be performed with the 203k streamline loan.

Getting together an accurate bid from the contractor is also critical in the appraisal stage. This allows the appraiser to determine the current value of the home and the value after the repairs and modifications have been completed.

The FHA 203k streamline also offers an escrow feature to protect the home buyer and the lender. The contractor will receive an initial portion of the funds in order to purchase materials and begin work on the home. The final amount of the money will not be disbursed until the work has been completed and inspected.

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Thursday, September 13, 2012

Monday, September 10, 2012

203k Loan Program

The Section 203k program is the Federal Housing Administration's (FHA) rehabilitation program. The FHA is part of the Department of Urban Development (HUD) which administers various single family mortgage insurance programs. The 203k program is an important tool for revitalizing communities and expanding neighborhood home ownership opportunities.

Most lenders provide only permanent financing. Lenders typically do not close loans and release the mortgage proceeds until the condition and value of the property provide adequate loan security. When rehabilitation and/or repair is involved, the lender usually requires the improvements to be completed prior to the mortgage proceeds being distributed.

When a home buyer wants to purchase a house in need of repair or modernization, the home buyer usually has to obtain financing first to purchase the home. Additional financing is needed to do the rehabilitation construction and a permanent mortgage when the work is completed to pay off the interim loans with a permanent mortgage. Often the interim financing (the acquisition and construction loans) involves relatively unattractive high interest rates and short amortization periods. The Section 203k program was designed to address this situation and provide home buyers with better financing options for rehabilitation loans. Borrowers can get one mortgage loan, at a long-term fixed or adjustable rate, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation of the home, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work. To minimize the risk to the mortgage lender, the mortgage loan is eligible for endorsement by HUD as soon as the mortgage proceeds are disbursed and a rehabilitation escrow account is established. At this point the lender has a fully-insured mortgage loan.

For properties to be eligible for the 203k program, they must be a one to four family dwelling that has been completed for at least one year. The number of units on the site must be acceptable according to the provisions of local zoning requirements. All newly constructed units must be attached to the existing dwelling.

Cooperative units are not eligible for this program. Homes that have been demolished or will be razed as part of the rehabilitation work are eligible provided some portion of the existing foundation system remains in tact.

In addition to typical home rehabilitation projects, this program can be also used to convert a one family dwelling to a two, three or four family dwelling. Conversely, an existing multi-unit dwelling could be decreased to a one to four family unit dwelling.

An existing house or modular unit in a different location can be moved onto the mortgaged property; however, release of loan proceeds for the existing structure on the non-mortgaged property is not allowed until the new foundation has been properly inspected and the dwelling has been properly placed and secured to the new foundation.

A 203k mortgage may be originated on a mixed use residential property provided the following items are met:

- The property has no greater than 25% for a one story building; 33% for a three story building; and 49% for a two story building of its floor area used for commercial (storefront) purposes.

- The commercial use will not affect the health and safety of the occupants of the residential property.

- The rehabilitation funds will only be used for the residential functions of the dwelling and areas used to access the residential part of the property.

The Department also permits Section 203k mortgages to be used for individual units in condominium projects that have been approved by FHA, the Department of Veterans Affairs, or are acceptable to FNMA under certain guidelines.

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Friday, September 7, 2012

Have You Considered A 203K Rehab Home?

There are mortgages available specifically to buy and fix a home. These definitely should be considered if a home is in good condition, but does not meet your goals, i.e. out dated kitchen, flooring, issues with roof, etc. This program allows you to both purchase and repair a home with a single transaction.

In addition to a typical home improvement project for this type of loan package, the 203-k mortgage loan program can be used to convert a one-family dwelling to a multi-family dwelling; perfect if you need to move the in-laws in with you.

You're probably more acquainted with mortgage financing plans that provide permanent financing. That is you pay your closing fees, sign for a home, and deal with the lender on a monthly basis, when you pay your mortgage. The significance of a 203K loan allows the buyer to roll in the costs of repairs to rehabilitate the property into the mortgage loan.

When rehabilitation is involved, the lender requires the home improvements to be finished before the long-term mortgage is made. You really sit down at closing to sign off on 2 loans; a temporary one for construction/rehabbing of the property, then your 15 or 30 year mortgage after all improvements have been completed.

There are 2 FHA 203k loans; the FHA 203k Rehab and the FHA 203k

Streamline. The FHA 203k Rehab enables borrowers to obtain a single mortgage to finance the purchase and the rehabilitation costs of the property. Minimum improvements are $5,000.

The 203k Streamline key points; this loan has many of the same attributes of the 203k Rehab loan, except the Streamline loan has no minimum amount tagged onto repairs. The maximum amount of repairs is limited to $35,000 for major remodeling.

The 203k loan takes an average of 45 days to close; 30 days for minor remodeling projects and 60 days for projects involving major structure remodeling.

The qualification requirements are the same as a typical FHA mortgage loan however, you all need to submit a home project plan and budget for the improvements. The only additional item that the borrower needs is enough cash reserved to pay for materials and labor until they are reimbursed through the loan.

With an over-abundance of foreclosed properties that need rehabilitation, the 203K loan package is a perfect opportunity to get more house for less price (as-is market value) and be able to make improvements without borrowing from your personal savings.

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Tuesday, September 4, 2012

How to Finance Fixer-Upper Homes

If you are considering buying a home in need of repair or even finance needed repairs to a current home you own and finding financing is a bit tough for you, then the Section 203(k) loan program offered by the U.S. Department of Housing and Urban Development (HUD) may be a good choice for you. This program allows you to finance the purchase of a house or refinance your current mortgage and include the cost of repairs along with the mortgage.

The Section 203(k) loan program is HUD's main program for the rehabilitation and repair of single family homes. The loans are provided through HUD-approved mortgage lenders across the nation and insured by the Federal Housing Administration (FHA), which is part of HUD. Low and moderate income buyers can be eligible since the down-payment can be as little as 3 percent of the loan but this is really not an option for buying multiple houses since the property must be used as a principal residence by an individual or family.

How the Loan Works

A Section 203(k) loan is a 15- or 30- year fixed-rate mortgage or can be an Adjustable Rate Mortgage (ARM) . The total amount of the loan will be based on the estimated value of the house after the renovation is completed. A portion of the loan is used to pay for the purchase of the home, or if it is a refinance, to pay off any existing debt. The rest is placed in an interest-bearing account and is released in stages as repairs are completed.

You will be required that you use a minimum of $5,000 toward repairs or improvements and you normally have to complete the repairs within six months after the loan closes, depending on the amount of work needed to be done. The first $5,000 will cover eliminating building code violations, modernizing, or making health and safety-related upgrades to the home or its garage. You may add minor or cosmetic repairs after this requirement is satisfied but you cannot include improvements for commercial use or luxury items, such as tennis courts, gazebos, or new swimming pools.

The program has many rules and you should visit the HUD website at to learn more about which homes are eligible to purchase using the 203(k) program and what types of improvements or repairs are covered with the program.

Once you have a property that you wish to purchase in mind, talk to your real estate professional, or if you are wanting to repair your existing home, you should find a HUD-approved lender who will help you understand the next steps and details of the 203(k) loan program. You also can contact a HUD-approved housing counseling agency or check the HUD website to get more information about the program.

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Saturday, September 1, 2012

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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