Renovations and home improvement projects can add value to your home. Unfortunately, many projects require up-front cash for materials and labor. If you’re making significant improvements to your home or are interested in purchasing a fixer-upper, an FHA 203(k) home renovation loan can help you with financing home renovations. While the qualifications for FHA loans are lower than other loans, they do still exist. Before you apply for an FHA loan, do a self-check: use the below criteria to examine your current financial status and debt-to-income ratios, and determine if FHA 203(k) financing is right for you.
Examine Your Credit Report
In general, borrowers who would like to get a mortgage with a down payment as low as 3.5 percent should have a credit score of 620 or higher. Those with credit scores under 620 are generally not eligible for an FHA loan. In some cases, exceptions can be made for those with lower credit scores, as long as they meet other requirements. If your credit score is worrying you, contact a 203(k) specialist today for more information about qualifying for 203(k) financing.
Debt-To-Income (DTI) Ratios
As with other loans, FHA loan requirements include a maximum debt-to-income ratio. When a borrower applies for an FHA loan, they’re required to disclose all debts, open lines of credit, and all sources of income. From this information, the banks evaluate your debt-to-income ratio. According to lenders, the FHA allows you to use 31 percent of your income towards housing costs, and 43 percent towards housing expenses and other long-term debt. If these numbers seem unforgiving, the FHA does offer some flexibility under the right circumstances.
Minimum 203(k) Loan Down Payments
There are plenty of differences between FHA 203(k) loans and conventional home loans, including the minimum down payment requirement. When it comes to FHA loans, the down payment requirement is 3.5 percent of the contract sales price of the home. If you do decide to put more than 3.5 percent down, you’ll effectively be lowering your monthly mortgage bills. In some designated high cost metropolitan locations, the down payment may be 5%, but this requirement on a 203(k) loan is no different than any other FHA loan program. Additionally, the seller can also still help you with closing costs as well up to 6% of the sales price, just like with a regular FHA loan.
One important detail to be aware of before considering an FHA 203(k) loan – the FHA requires all down payments to be made by the buyer themselves; the buyer must provide the funds for the down payment and other up-front costs in addition to the down payment amount. However, gift funds are allowed as part of a partial or full down payment for an FHA 203(k) loan but strict documentation is required including a letter that no repayment of the gift funds is required.
Two mortgage insurance premiums are required on all FHA loans: an upfront premium and an annual premium. The upfront mortgage insurance premium (UFMIP) is 1.75 percent of the loan amount, or about $1,750 for a $100,000 loan. This premium is paid when the borrower gets the loan, and can be financed as part of the loan amount. Although the second premium is called an annual premium, it is paid on a monthly basis. This premium, also known as the mortgage insurance premium (MIP), can be up to 1.05% of the loan amount annually. The amount varies depending on the length of the loan, the total amount borrowed, and the initial Loan-To-Value (LTV) ratio. For example, an annual premium of 0.5 percent is required for a 15-year loan with a down payment of less than 10 percent.
Finally, it’s important to understand which projects qualify for 203(k) financing. First, if the residence isn’t your primary place of residence, you won’t qualify. As far as projects go, energy efficient upgrades, plumbing and electrical upgrades, weather stripping and insulation upgrades, disability improvement, basement completion and waterproofing, landscape improvements, removal of lead-based paint, and the installation of new windows and doors all qualify for FHA 203(k) financing. For a complete list of qualifying improvements, speak with a HomeBridge 203(k) loan specialist today.
What is an FHA 203(k) Home Renovation Mortgage?
Are you planning on purchasing a home that needs upgrades, repairs or large renovations? Are you interested in making improvements to your existing home? If you answered “yes” to either of these questions, an FHA 203(k) loan may be the perfect home improvement loan for you. In the past, homeowners and homebuyers would have to apply for a few different loans in order to finance their home improvements. Now, thanks to the FHA 203(k) mortgage loan, your mortgage and construction loans are conveniently done in one step. You’ll have the funds to pay for your home purchase and establish an escrow account to complete your renovations. Its all wrapped up into one singular home improvement mortgage, limiting closing costs to just one loan and simplifying the home renovation process.
Home renovation mortgage loans are available in amounts up to the FHA eligible county loan limits. Whether you’re a first-time homebuyer or have already purchased a few homes, the 203(k) mortgage loan is a viable option. Since most renovations that add value to the property are eligible under a home renovation mortgage loan, the loan can be used to paint your interior, upgrade your kitchen, repair the roof, remodel your bathroom, replace flooring, or make structural alterations or improvements, among other eligible repairs. For more details, please visit our page on the full list of eligible repairs in the Limited 203(k) & Standard Loan Eligibility Guidelines.
Advantages of an FHA 203(k) Mortgage Loan
Prospective buyers sometimes shy away from purchasing homes that need renovation because they can’t come up with the cash for a new roof or foundation repairs, in addition to the down payment, closing costs, and moving expenses. Since the FHA 203(k) loan includes the renovation cost into one convenient loan, the buyer is able to extend their payments for the renovation over the life of the loan, rather than paying one lump sum. 203(k) mortgage loans come with a bit of a tax break as well. Homeowners can deduct the interest they pay on their entire mortgage on their income taxes*, even the portion they use for renovations.
In the past, it was easy for homeowners to take out a home equity loan or additional line of credit to fund home improvement projects. Unfortunately, present day mortgage lenders are far less likely to approve a home equity loan. In fact, near perfect credit and significant home equity are almost required in order to qualify for a second mortgage. This is where an FHA 203(k) mortgage loan can help: down payments are minimal, home equity isn’t required, and those with a credit score as low as 620 are eligible. If your credit score is lower than the minimum, don’t worry – you may can still be able to apply for the loan if you meet other requirements.
FHA 203(k) Mortgage Loan Options
When it comes to FHA 203(k) loans, there are two options: a standard option and a limited option. Which option is best for you depends on how much you intend to spend on your renovation and what home improvement projects you intend to complete. Here’s a breakdown of each:
- Limited Loan: This loan is limited to a maximum of $35,000 in repairs, regardless of the home’s value. There’s no minimum for the Limited K loan, so even minor home improvements are covered under the Limited loan. One caveat: repairs must start within 30 days of your loan closing, and must be finished within six months. This loan also limits the types of renovations you can make to non-structural, non-luxury improvements. So, you won’t be able to install a luxurious pool with an outdoor cabana, but you’ll be able to upgrade your kitchen counters or install a new air conditioner.
- Standard Loan: Referred to as the Consultant K loan by HomeBridge, the standard loan is intended for bigger projects. In order to apply for this loan, you must have at least $5,000 in planned repairs. Although virtually any home improvement that adds value to the property is eligible, there are some limitations on certain luxury items. If you choose the Consultant K loan, your mortgage lender will require you to work with a HUD-approved 203(k) consultant who will inspect and evaluate your renovation. For more differences between the two, please visit our FHA Limited 203(k) K vs. “Standard 203(k)” Consultant K loan page.
FHA 203(k) Loan Lenders - Why Choose HomeBridge Financial Services
When compared to other funding options, such as cash advances and bank loans, an FHA 203(k) loan is the perfect financing option for first-time homebuyers and current homeowners alike. If you’re interested in financing your home repairs with an FHA loan, there is an influx of 203(k) lenders fighting for your business. While there may be other 203(k) loan lenders available to you, the truth is that HomeBridge is one of the leading 203(k) mortgage lenders in the industry.
As of April 2016, HomeBridge is one of the top 203(k) lenders in the nation. According to data from the Department of Housing and Urban Development (HUD), HomeBridge ranks No.1 in the nation for originating 203(k) renovation loans. At HomeBridge, our loan specialists understand that purchasing a new house or renovating a current home are big steps for anyone. That’s why our FHA 203(k) loan lenders will work closely with you every step of the way until we find a mortgage option that best suits your needs.
When it comes to choosing a 203(k) lender, experience is important. As one of the largest retail residential mortgage lenders in the United States, HomeBridge has funded over $17 billion in the last two years alone. With lending in 48 states, including the District of Columbia, HomeBridge has over 800 licensed originators in 200+ branches nationwide. Whether you live on the West Coast, East Coast, or somewhere in between, HomeBridge has an experienced and qualified 203(k) Mortgage Loan Originator ready to handle your needs.
There are hundreds of variables that can affect the outcome of your mortgage transaction. An inexperienced mortgage lender can make mistakes, costing you thousands of dollars and creating a stressful situation that could result in you being denied a mortgage after investing your time and money into a mortgage transaction. By choosing HomeBridge, you’ll be working with an FHA 203(k) lender in the industry who is experienced, accurate, friendly, and transparent in helping you find the perfect loan.
Options to Meet Your Needs
Many 203(k) lenders believe a one-size solution fits all. Unfortunately, this isn’t the case. At HomeBridge, we’ll take the time to get to know you and your future renovation plans. From there, we’ll encourage you to apply for either the FHA 203(k) “Limited K” or Standard “Consultant K” loan. Since we’re a direct lender, you won’t have to worry about third party overlays. At HomeBridge, we make our own underwriting decisions, and control the guidelines and processing service levels of all in-house loans. Regardless of the specific type of loan you choose, HomeBridge will guide you through the complicated process from start to finish.
Quality Customer Service
At HomeBridge, our clients are more than just a name on the page. We pride ourselves on working with you to make your experience as stress-free and easy as possible. As your 203(k) mortgage lender, we’ll discuss and explain loan options, review and discuss all loan documents and settlement charges, educate you about the loan process, provide you with regular updates about your loan, and act as your overall loan adviser. At HomeBridge, we know how important your home is and our experienced FHA 203(k) professional will be there every step of the way.
*Please consult a tax advisor for further information regarding the deductibility of interest and charges.
The above content is for general informational purposes only and is not provided as professional advice for your specific situation. Please speak to a Mortgage Loan Originator to discuss loan options available.