The Home Buyer's Korner

Information presented should be used for educational purposes only.

February 16th, 2017

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FHA 203(k) Home Renovation Loan Program

The FHA 203(k) home improvement loan is a renovation loan program for both homebuyers and existing homeowners. The program allows a individuals, local government agencies, and HUD approved non-profit agencies to purchase a home that’s in poor shape and fix it up, or refinance and repair a current residence.

Property types include single family homes, town homes, manufactured homes, modular housing, 2-to-4 family units, and approved condominiums.

The FHA 203(k) home loan program is offered in two scenarios:

• The streamlined FHA 203(k) is for homes with non-structural repairs and has limited renovations costing at least $5000, but no more than $35000. The lenders expect all repairs to be completed within 30 days of closing, and great for all kinds or remodeling, home improvements, energy efficient improvement, purchasing appliances to update your kitchen, or replacing dated carpeting.
• The standard FHA 203(k) is suitable for homes that require structural repairs or has a total repair and remodeling cost that exceed $35000. Generally, you can take up to six months to complete repairs. If the home isn’t habitable during the renovation, HUD will authorizes the lender to escrow sufficient funds to pay the mortgage interest, principal, property taxes and insurance, so the homebuyer is not burdened with a house payment and rent.

Complete your renovations as planned, on or under budget, and before schedule, if possible. Doing so, not only lets you begin enjoying your new residence, but any unused escrowed funds; like principle and interest, property taxes and insurance, will be applied as a principle reduction to the homebuyer’s mortgage or deed of trust.

FHA 203(k) home renovation loans allow homebuyers to purchase a home with as little as 3.5% downpayment, based on the purchase price or appraised value and needed repairs, up to the maximum loan limits for each county, set by HUD.

Here’s just a few possible upgrades available with FHA 203k home loans:

• Repair or replacement of roofs, gutters and downspouts;
• Repair, replacement or upgrade of existing HVAC systems; plumbing and electrical;
• Repair or replacement of flooring and carpeting; windows and doors
• Remodeling, such as kitchens and bathrooms;
• Painting, both exterior and interior; and exterior wall re-siding;
• Lead-based paint stabilization or abatement of lead-based paint hazards;
• Weatherproofing, including storm windows and doors, insulation, and weather stripping;
• Purchase and installation of appliances (range, refrigerator, hot-water heater, etc.);
• Accessibility improvements for persons with disabilities;
• Repair, replacement or addition of exterior decks, patios, porches;
• Site amenity improvements like sidewalks and driveways;
• Basement finishing, remodeling, or waterproofing;
• Repair or replacement of septic system and/or well;
• Major rehabilitation or remodeling, such as the relocation of a load-bearing wall; repair of structural damage; room additions or foundation repairs.

It’s a common misconception that foundation repairs are not allowed when considering the FHA 203(k) home renovation loan as a financing option. That’s simply not true! If you notice cracks on the interior walls, large trees planted close to the house, windows or doors not closing properly, or cracks in the garage floor then the home may have foundation issues. All of these issues can be easily remedied with the use of the FHA 203(k) home renovation loan.

You can include energy-efficiency upgrades like installing a new furnace, windows, or attic insulation, if you include an Energy Efficient Mortgage (EEM) with your FHA 203(k) home renovation loan. HUD allows for 100% financing of any EEM improvements up to 5% of the loan amount, not to exceed HUD maximum loan limits, established for each county.

Energy-efficient upgrades can only be included in the mortgage or deed of trust if the total, combined cost of the improvements are less than the projected dollar amount they will save the homeowner over their useful lifetime. To estimate the cost savings, an energy consultant will perform an energy inspection and use a Home Energy Rating System (HERS) to prepare a report.

It’s kosher to use a 203(k) home loan program to remodel a home that includes some commercial space, as long as you use the money only for projects in the residential part of your home and the amount of commercial space doesn’t exceed these limits:

• 25% for one-story building;
• 49% for two-story;
• 33% for three-story building.

Homebuyers considering a condominium, need to insure that the development is on the FHA Approved Project List, or meets VA, Fannie Mae, or Freddie Mac project guidelines. Also, your building can have no more than four units, though there can be multiple buildings in the development. It’s worth noting that repairs for approved condominiums are limited to only the interior of the homebuyer’s unit.

Other Related Posts

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