FHA 203k Loans - Financing a property that requires repairs on a budget
What is an FHA 203k loan?
An FHA 203k, also known as a Rehab Loan or FHA Construction Loan, allows an individual to finance two elements:
Purchase of a property
Requested repairs for that property
Typically, lenders will not approve of loans for homes that require major repairs, however, the FHA 203k loan grants the lender the opportunity to track and verify repairs through this loan. Since this loan addresses the repairs that lenders would disapprove of otherwise, those looking to purchase a fixer upper home often opt for it.
Though this may be an ideal option for those willing to undertake renovations, there are certain livability and safety standards the property must meet. If the property is too run down, the lender may not approve of the financing.
The FHA 203k loan program may be a great option for those on a budget that are looking to buy an older home and repair it.
How does the loan work?
The process of the FHA 203k loan program includes the following:
The buyer must apply for the loan through a 203k-approved lender
The loan must be approved
The buyer will choose a contractor for the property and possibly an architect
The property must be assessed and receive estimates for the repairs needed (referred to as bids)
The loan will close
Repairs will be made
The house will be ready for move-in
The process may include several steps, but your lawyer and lender will help you navigate this process each step of the way.
Deciding which home improvements are desired or necessary will be the first major decision the buyer must take when applying for the loan.
Address safety and health hazards first
The lender will require that you attend to any elements of the property that may be considered safety or health hazards. Hazards may include but are not limited to mold build-up, broken windows or walls, lead-based paint, and missing handrails.
Once you take care of safety and health precautions, you will then be able to prioritize any cosmetic changes you would like to make to the property. Appliance replacements, cabinetry and light fixtures may be considered during this step of the process.
After compiling a list of must-haves for your home project, you will then begin your search for contractors to complete each task.
Any contractor you choose must be licensed, insured, and have a full-time business. Unfortunately, you will not be able to choose any contractors that complete these home improvement projects on the side, and you cannot choose to DIY unless you are licensed and insured as a contractor.
The contractor you hire will have to complete necessary paperwork and forms as required by the 203k loan, as well as for the contractor to front funds, so it might be best to hire a contractor who has had experience in completing one or many 203k renovations in the past.
Once you have hired a suitable contractor for your home projects, you will have to receive official bids. All bids must be accurate, as the lender will submit final bids to an appraiser who will build the value of the work into the future value of the property. The future value of the property is ultimately what your loan will be based on.
It is important to note that any change to the bid dollar amounts may impact your loan as it could incur additional appraisal costs and will trigger the re-approval process with your lender. Make sure to go over this with your contractor so that you all have the same understanding of the process.
Submitting requirements to the lender
After you receive official and accurate bids, you must gather your income, asset, and credit report information. These documents along with the required bid paperwork will kickstart the final approval process for your loan.
When your loan is approved, you will sign mortgage documents and become the title owner of the property.
Making repairs and starting renovation projects
Your contractor may begin any and all home improvements once your loan is finalized and you are the l owner of the property. Your move-in date will depend on the scope of the project and timing of completion of construction.
You may want to consider pushing it back if your home repairs are extreme. In other words, moving in right at the time of closing may not be practicable. You can finance up to six months of mortgage payments into your loan if you decide to go this route.
If you think a FHA 203k loan may be the right for you, schedule a consultation with Kershner Sledziewski Law and we can help guide you through the process.