Wednesday, May 8, 2013

Which Improvements Can You Make With FHA 203(K) Loans?

When it comes to home improvement loans, homebuyers wonder which changes can be made - and which can't. Although taking out a small loan for a do-it-yourself project has few restrictions, just as long as the amount is paid back, FHA 203(k) programs, which cover the costs of both purchasing and repairs, have more specific lists of improvements.

Like any loan, FHA 203(k) programs require the borrower to meet minimum credit score, income, and employment standards, and the property purchased, as well, needs to fall within certain guidelines. While it must be the primary residence for the borrower no later than one year from closing, the property cannot be for recreation, vacation, investment, commercial, or rental purposes, unless it's an owner-occupied multi-family unit.

In some cases, however, borrowers may want to convert commercial property into residential housing, and FHA 203(k) loans apply to this type of project. Nevertheless, with this exception, properties that can be purchased may include single-family homes, an FHA-approved condominium, or a multi-family building to be converted into a two- to four-family home. FHA 203(k) does not apply to mobile homes.

With the exception of specific improvements, loans for repairs range from $5,000 upward. 203(k) Streamline programs, however, cannot go above $35,000.

For FHA 203(k) loans, the following repairs can only be made:

• Any structural alterations and damage repair
• Repairing termite or water damage
• Converting a single-family home into a duplex or a six-unit property into a triple-decker.
• Replacing any wells, septic tanks, windows, or hot water systems
• Repairing any flooring, roofing, hand rails, down spouts, or exterior siding for general livability (not aesthetic improvements)
• Improving handicap accessibility

For 203(k) Streamline loans, all repairs must be made prior to the borrower moving into the property. The following are considered acceptable for this home improvement loan:

• Repairs to the basement, deck or patio, electrical system, floors, or HVAC
• Minor remodeling
• Installing new appliances (up to $2,000)
• Adding new windows
• Painting
• Plumbing
• Roofs
• Septic or well repairs
• Adding a sewer hookup
• Weatherization

Lenders, as well, monitor how all repairs are carried out and require a state-licensed contractor to do improvements. Once the loan closes, the amount for repairs is kept in a separate escrow account, with the lender sending the payments in installments to the contractor. So the lender knows what is being done, a contract must be drawn up in writing, with all changes, modifications, and materials described in detail with a completion date and payment terms.

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