An FHA 203(k) rehab loan, also referred to as a renovation loan, enables homebuyers and homeowners to finance both the purchase or refinance along with the renovation of a home through a single mortgage. Instead of applying for multiple loans, an FHA 203(k) rehab loan allows homebuyers to purchase or refinance their primary home and renovate it with one convenient loan. By allowing the buyer to finance the cost of improvements into the purchase or refinance of a home, home rehab loans take the financial guesswork and frustration out of renovating a home.
In the past, purchasing a fixer-upper was difficult: most banks wouldn’t grant a mortgage on a house in bad shape until repairs have been completed, but repairs couldn’t possibly be made until the house is purchased. This put homebuyers in a difficult position. Now, thanks to the FHA 203(k) rehab loan, it’s possible to purchase a property and include the cost of repairs and improvements in the loan — making it easier than ever before to purchase a fixer-upper or renovate your current home.
Requirements for Rehab Home Loans
In order to qualify for an FHA 203(k) home loan, a homeowner must meet certain requirements outlined by the Department of Housing and Urban Development (HUD). These requirements include finding a property and that property may need some cosmetic or updating, finding a qualified lender, and meeting all lender requirements, including minimum credit scores, debt-to-income ratios, and proof of income. Once your loan is approved, a date will be set for closing. After closing, a Repair Escrow Account is set up and the repairs must start within 30 days of closing and completed within six months. With a Limited K Loan typically the contractors receive 50% of the total amount agreed on within 15 days of the loan closing and the remaining balance is paid after the work is completed. With a Consultant K Loan, a HUD 203(k) consultant will work with you as the owner and they will inspect repairs as they are completed and allow for interim draw payments based on the completed work passing final inspection. In both types of 203(k) Loans, after the final disbursement, any remaining funds are applied to the principal balance of the loan.
Please visit HomeBridge Financial Services’ page on the full list of eligible and ineligible 203(k) repairs for both Limited 203(k) & Standard Loans.
203(k) Rehab Loan Advantages
Rehab loans are designed to help homeowners improve their existing home or buy a home that can benefit from upgrades, repairs, or renovations. A 203(k) rehab loan is a great way to help you create your own home equity fast by bringing your home up to date. Not only will you be able to upgrade your home with your style and needs, but you’ll also be able to buy a home that’s usually listed at a lower price due to the older existing condition. That’s why a 203(k) rehab loan is great, it can help you gain equity and offer you great interest rates for your rehab in one loan.
In addition to a low interest rate, rehab home loans come with a low down payment and more savings options. Since only a minimum down payment of 3.5 percent is required, you won’t deplete your savings trying to come up with a down payment. Because FHA insures your mortgage, the qualifications for an FHA loan may be more lenient than for a conventional loan. Ultimately, 203(k) rehab loans are a convenient way to finance your home improvements without the need for perfect credit, huge down payments, or high interest rates.
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.