Homes that have been recently updated and remodeled are in high demand and It is not unusual to see potential buyers enter into bidding wars resulting in many buyers submitting multiple offers without being accepted.
So what strategy can these buyers use to help achieve their dream of Home ownership?
One answer is to look at homes that need some TLC using the FHA Rehabilitation 203K Mortgage. These homes tend to have less competition from other buyers and in many cases the buyer can build significant equity with minor improvements.
So how does the FHA 203K loan work? In many ways this loan follows the same process as a normal FHA mortgage with the additional step of selecting a contractor and the repairs to be completed.
Here’s how the process works:
- Contact an experienced FHA 203K Lender for Pre-Approval to determine the purchase price and total payment that will work for you.
- Select a home and enter into a Sales Contract to purchase.
- Choose your projects / repairs to be completed: some buyers will select the contractor first to help identify and estimated the costs of repairs – It helps to find Contractors experienced with the FHA 203k Process.
- Finalize the repairs to be completed and submit to the appraiser along with the contractor’s estimated costs.
- Submit for Lender underwriting approval and close your loan.
- Contractor completes the repairs and the appraiser will complete final inspection.
- Move into your newly renovated home!
And now for the details…
- Credit: FHA will allow credit scores down to 580 but a middle score of 620 is usually advisable to secure a FHA 203k loan.
- Down Payment: The minimum down payment for a FHA loan is 3.5%, this amount is based on the sales contract price and the cost of improvements to be completed.
- Loan Amount: FHA 203k loans allow you to borrow up to 110% of the future appraised value or total sales price plus repairs (whichever is less). Check for FHA limits in your county hud.gov.
- Occupancy: You must live in the property and it must be your principal residence, FHA does not allow Second or investment homes.
Allowable Repairs: there are 2 categories of 203K loans depending on the needed repairs.
This option is used for relatively minor repair work with a $35,000 limit. Non Structural repairs are allowed such as kitchen and bathroom remodels, appliance, flooring and roof replacement and repairing safety and health issues. There is also a contingency requirement to make sure there will be sufficient funds to finish the repairs, this limits the total amount closer to $31,000.
With this option you can do major products such as structural alterations, converting a multi-family home into a single family and vice versa.
The only limitations are non-permanent changes, luxury items and projects taking more then 6 months. The standard 203k also requires the use of a HUD consultant which can add to the closing costs.
The most obvious benefit is the equity you can obtain with the right repairs to a home that is priced right. In a competitive housing market this option opens up a larger inventory of homes with lessor upward price pressure for homes needing repair.
Deciding on the work to be completed and finding a reputable contractor who can complete the work on a timely basis along with the required paperwork by the lender is a challenge. You should also know the loan process will take more time than a standard purchase mortgage and the closing costs will be higher.
Brian McMahon, Mortgage Loan Originator – Team, NMLS #327382
HomeBridge Financial Services, Inc.
5260 State Road 64 East
Bradenton, FL 34208
o: (941) 782-2092, Ext. 427 c: (941) 720-2573 f: (866) 215-2916