The FHA 203(k) Loan–Turning “Fixer-Uppers”into Dream Homes

The purchase of a house that needs repair is often a catch-22 situation. The bank won’t lend the money to buy the house until the repairs are complete, and the repairs can’t be done until the house has been purchased.

203k 2The FHA 203(k) Rehab Loan Program can help you with this dilemma. It allows you to purchase a property plus include in the loan the cost of making the repairs and improvements with a single mortgage. It is available to persons wanting to purchase or who own a 1-4 family owner-occupied property.

The total amount of your mortgage will be based on the projected value of your home after the renovation is complete, taking into account the cost of the work to be done. A portion of the loan is used to buy the new home, or in the case of a refinance, to pay-off any existing debt. The remainder of the loan proceeds are placed in an account for your benefit and released in stages as the rehabilitation work is completed.

Here are the Steps to a Successful Closing of a FHA 203(k) Loan:

• A potential homebuyer locates a fixer-upper and executes a sales contract after doing a feasibility analysis of the property with their Realtor. The contract should state that the buyer is seeking a 203(k) loan and that the contract is contingent on loan approval based on additional required repairs by the FHA or the lender.
• Within 7 to 10 days of signing the purchase agreement. the buyer should obtain an inspection of the property by a professional Home Inspector, a termite company and a well/septic inspector (when applicable) to make sure there are no unseen problems with the property.
• The buyer is also required to work with an  FHA Approved Consultant who will inspect the property along with the borrower to determine what repairs are needed to meet minimum FHA requirements. The borrower will also indicate any additional work they wish to have done to the property.
The Consultant will provide the buyer with a Work Write-up/Specification of Repairs which includes the Consultant’s cost estimate for completion of the project.
• The buyer will then select a contractor to perform the work. All rehab work must be performed by an experienced, licensed contractor and satisfy all lender requirements. All subcontractors must be licensed as well. FHA does not allow borrowers to use relatives as their contractor. “Self-Help” is not allowed either.
• A Homeowner/Contractor Agreement is executed between the borrowers and the contractor to ensure that a contractor is in place who will be able to complete the work for the loan amount.
The Homeowner/Contractor Agreement will include a detailed proposal (Plans and Specs) from the contractor showing the scope of the work to be done and including a detailed cost estimate on each repair of improvement of the project. This estimate must ultimately match $ for $ with the Consultant’s Work Write-up/Specification of Repairs. All work must be completed within 6 months of closing the loan.
• The Buyer is then ready to submit a formal application to the lender. The loan amount will include the agreed on purchase price for the property plus the estimated cost to rehab the property. The amount of the loan could also include a contingency reserve of 10% to 20% of the total remodeling costs and would be used to cover any extra work not included in the original proposal. It can also include up to 6 months of mortgage payments if the borrower is not going to live in the property during construction.
♦ The total loan cannot exceed FHA’s maximum mortgage limit for the        area.
♦  The 203k loan requires a minimum 3.5% down payment based on    the total amount of the home’s purchase price plus the cost of repairs.
• An “After Improved” Appraisal is ordered to determine the value of the property after the project is completed as compared to similar properties in the neighborhood.
• When the borrower passes the lender’s credit-worthiness test and the project meets FHA Guidelines, the loan closes for an amount that will cover the purchase or refinance cost of the property, the remodeling costs and the allowable closing costs.
• At closing, the seller of the property is paid off and the remaining funds are put in an escrow account to pay for the repairs and improvements during the rehabilitation period.
• The mortgage payments and remodeling begin after the loan closes. The borrower can decide to have up to six mortgage payments (PITI) put into the cost of rehabilitation if the property is not going to be occupied during construction, but it cannot exceed the length of time it is estimated to complete the rehab.
• Escrowed funds are released to the contractor during construction through a series of draw requests for completed work. To ensure completion of the job, 10% of each draw is held back; this money is paid after the lender determines there will be no liens on the property.

ELIGIBLE 203K IMPROVEMENTS
FHA 203k loans are offered only on 1-4 family owner-occupied properties. A full FHA 203k allows for complete renovations and rehabs of properties where the improvement cost exceeds $35,000. A Streamline FHA 203k may be used when the cost of the project ranges from $5,000 to $35,000.
The types of Improvements that borrowers may make using full FHA 203k financing include:

• Structural alterations and reconstruction
• Repair or replacing well and/or septic system
• Roofing, siding and gutters
• Major Landscape work and site improvements
• Enhancing accessibility for a disabled person
• Additions
• Kitchen and Bathroom renovations home repair 2
• Replace/Upgrade existing HVAC systems
• Replacement windows and doors
• Finish Basements and Waterproofing
• Plumbing and Electrical upgrade
• Appliances, Floor and Wall covering
• Elimination of health and safety hazards
Luxury Items that do not become permanent Part of the property are not eligible for improvements include; swimming pools, tennis/basketball courts, and hot tubs.

If you want to buy a home that needs repairs, FHA’s 203(k) may be a good option for you.Get Pre-Approved
Reach out to me with any questions or concerns you may have about the program and to take advantage of my FREE Jump Start Mortgage Pre-Approval

 

 

 

Should I Renovate My Current Home or Move To a New One?

There comes a time in many families lives when they realize their First Home no longer fits their needs. Maybe more space is required for a growing family or a pay raise allows you to upgrade to something a little nicer. Before deciding whether to renovate your current home or move into a new one, there are a lot of things to consider.

First, you have to think about finances and your future plans. What is your current home worth?RENOVATION What would your new home budget be and would it provide you with a significant improvement in the current market? What is you dream home? Could renovations even make this possible within your budget? These are all things to consider very seriously when making your decision.

After you ponder these things and determine that both options are possibilities, there are some more specific pros and cons to each choice.

MOVING
Pros:
♦   Fresh Start – Moving allows you to start fresh with a new house in a different location. Whether you go across the street or across the country, it is a very exciting change.
♦   Taxes – In some cases, moving can qualify you for certain tax breaks and your new location may have cheaper taxes. Keep in mind, however, it may be more expensive as well. Be sure to ask your realtor about all of this when looking.
♦   Getting A Mortgage – A new home can allow you to go into the mortgage process with more experience and maybe more money than you had before.
Cons:
♦   Moving – Moving is a brutal process. With packing and shipping and unpacking, it is an extremely stressful process that many people would like to avoid if possible.
♦   Cost – There are a lot of fees associated with moving. Aside from house price, paying for movers and realtor fees alone can seem overwhelming. These are the major two, but other costs can sneak up on you as well.

RENOVATING
Pros:
♦   Your Design – When looking at a new home, you often have to accept that there will be one or two features in every house that you are not in love with. When renovating, you can make sure everything is designed and carried out to your exact specifications.home renovation
♦   Keep Your House – Renovating allows you to have an updated version of the house you originally fell in love with. This allows you to keep your community connections and be in the same neighborhood.
Cons:
♦   Unpredictable Expenses – Often times when doing renovations, issues will be found under the surface that can cost extra time and money. This can force you to exceed your budget or have to cut out some of the changes you would have liked to make.
♦   Huge Mess – While your renovations are taking place, your home will be a mess and in some stages, may be unlivable. If you can stay, it will be loud and stressful. If you have to leave, hotels and other expenses add up quickly.

While these tips can help you decide whether to renovate or move, sometimes there is a third option, both. If you have an ideal home in mind that can’t be created out of your current house, it can be hard to find it on the market as well. Buying a house that has the space you need and many good characteristics, but could use work, can be a great option. Houses that require some work can be bought cheaply and renovated into the home of your dreams. Products like the Norcom Dream Home LoanTM even make it possible to finance your new mortgage and renovations together, all in one loan.

Whether deciding to move, remodel, or both, it is hard to go wrong. The most important thing is to make sure the decision is well researched and that the entire family is on board. Accomplish that, and you will be sure to make the right choice.