Thursday, February 7, 2013

203K Loans

FHA 203K Loans

Are you interested in purchasing a fixer-upper home? If you know that the home you want to buy needs repairs and you are worried that you cannot get enough money back from your mortgage to make these repairs, then you should know about the Section 203(k) program offered by the FHA. Through this program you can purchase a home and get the money you need to fix-up the home financed into the mortgage.

For instance, if you want to purchase a home that is currently valued at $400,000 but it needs $50,000 worth of repairs many mortgage companies will not lend you more than the appraisal value of the home. With the FHA 203(k) program you can borrow the money to purchase the home and fix it up.

What types of homes can I purchase through the FHA 203(k) program?

You can use the program to purchase single family homes, up to four unit buildings as long as you live in one of them, and condominiums. There are certain restrictions for condominium repairs that you should consult your FHA approved lender about before purchasing.

Do I have to live in the home I purchase?

Yes. The FHA requires you to occupy the property you purchase.

Can I convert a single-family home into a multi-family home?

Yes. The FHA allows you to use the rehabilitation money from the loan to convert a single-family home into up to a four-unit home. The FHA also allows you to use the loan to move existing homes onto a new site if necessary.

What if the home I want to purchase need torn down and re-built, can I use the FHA 203(k) loan program for this?

Yes under certain circumstances. If you need to tear down the existing home and re-build a new home then you can use the 203(k) loan money as long as you are able to use some of the existing foundation.

How much can I borrow with an FHA 203(k) loan?

You can borrow up to 110% of the value of the home AFTER the repairs and rehabilitation of the home. The FHA will do a current value appraisal of the home in order to see what it is worth now. Then they will consider all of the rehabilitation you plan to do and do a second appraisal for what the home will be worth after the repairs have been made to the home. If you plan to install solar energy systems as part of your rehabilitation the FHA will insure up to 20% more of your mortgage values which means your lender will loan you more for your repairs and it will be easier to qualify for the loan.

Is there a minimum amount I need to borrow to make home improvements under the 203(k) program?
Yes. The FHA requires you to borrow at least $5,000 for repairs to the home in order to use the 203(k) program.

What improvements are allowed by the FHA?

The FHA requires you to make your home more energy efficient, but optional repairs that you can finance into your loan include:

• Repair to the structure of the home. This includes framing, chimneys, foundations, siding, new additions to the home, roofing, basement finishing, and more.

• Repair or the new building of bathrooms.

• New windows and/or skylights.

• Remodeling kitchens and new appliances.

• All types of flooring repairs or new flooring.

• Any repairs that are needed for safety like mold removal or lead paint.

• Repair to internal systems of the home like electrical, plumbing, heating, air conditioning, and ventilation.

• Repair or replacement of wells and septic systems (note that these repairs must be done first).

• Remodeling including new light fixtures, bathroom fixtures (even whirlpool bathtubs), painting, and more.

• Outdoor improvements including decks, patios, covered porches, landscaping, walkways, driveways, fencing, and more.

• Any rehabilitation that is necessary due to accessibility reasons for disabled people.

Once I have the loan money how long to I have to make the necessary improvements and repairs?

When you get a FHA 203(k) loan you sign an agreement that specifies what time frame you have to complete the repairs. You have to begin the rehabilitation within 30 days of signing the agreement and receiving the money. The rehabilitation must be completed within 6 months and any pause in the work cannot last for more than 30 days straight. This means that if you have different contractors working on different parts of your rehabilitation plan you need to make sure that there is not more than a 30 day stretch between the end and start of each contractor.

What if the price of the repairs increases once the work begins, can I borrow more money to cover the cost?

No. You need to find a contractor that can give you an accurate price before you take out your loan. Once you have the loan you cannot borrow more money. Discuss this with your contractor when you have the estimate done so that they know you cannot afford to go over the estimated cost.

I am not going to live in my home while it is being repaired, do I still have to make the mortgage payments out-of-pocket?

No. You do have to make the mortgage payments, but the FHA allows you to include the cost of your first 6 months of mortgage payments into the loan so that you do not have to try and bare the burden of paying your new mortgage and rent to live somewhere while you home is being rehabilitated.

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