FHA 203K Loans For Homebuyers of Fixer-Uppers
In this blog, we will discuss and cover qualifying for an FHA 203k loans for homebuyers and homeowners that need renovation. Over the last twenty years, the team at GCA FORUMS Mortgage Group originated, processed, and funded over a thousand FHA 203K loans. We have seen some interesting, frustrating, funny, some not so funny situations develop. I have been in the mortgage business for 30 years. I have experience in every aspect of residential and commercial lending. I have done my share of HUD 203k loans. One reason the team at GCA FORUMS Mortgage Group love originating HUD FHA 203k loans is that each case scenario is unique and interesting. I always learn something from each FHA 203k loans the team at GCA FORUMS Mortgage Group originate, processes, underwrites and funds. In this article, we will discuss and cover FHA 203k loans.
Case Scenario on FHA 203k Loans
In 2008 we were closing multiple HUD FHA 203k loans through our FHA approved 501c-3 non-profit partners. Our non-profit partners were HUD-approved to purchase, rehab and resell 1 to 4-unit properties at a 3.5% down payment. We had several non-profits that purchased, fixed, and sold over fifty properties. My favorite group was a small west side church, Gospel Temple. We’re still friends today. They had a purchase contract on a 4-unit property. They completed a plan review and did their appraisal. We underwrote the loan and cleared the file to close. Click here for Apply For FHA 203k Loans
Closing FHA 203k Loans
On the morning of the closing, as always with all FHA 203k loans, they did a final walk-through to make sure it had not been broken into or degraded in any way. When they got to the building with their realtor they thought they were on the wrong block. There was no building, just a vacant lot. It turned out the building next door was on the City of Chicago fast track demolition list. You guessed it, the city’s demolition crew knocked down the wrong building. Of course, the City of Chicago, Illinois claimed no responsibility. Luckily the buyer scheduled a final walkthrough to check the status of the property.
The moral to this story, always do a final walk-through as close to the closing as possible. Had they closed on this without looking at the property prior to closing they would have owned a vacant lot?
5 Reasons Why You Should Use FHA 203k Loans
It occurs to me that a lot of home buyers want to find a home they can just settle into and live. That’s fine, and for a simple situation like that, a conventional or FHA purchase loan is perfect. Then there’s the specialty group which seems to be a lot more plentiful these days. I like to call them my FHA 203k loans kids. They are somewhat younger and they have a knack for finding a fixing up stuff. This includes tinkering and just figuring out how to make things better. I’m not sure if their parents taught them how to do more by tinkering or instilling a sense of motion, (As in constantly in motion) but they like to find and fix things. Which brings me to the reason using FHA 203k Renovation Loans is a good idea for next home purchase. In this article, we will discuss and cover 5 Reasons Why You Should Use FHA 203k Renovation Loans.
Here Are 5 Good Reasons To Use FHA 203k Loans For Next Home Purchase
The U.S. Department of Housing and Urban Development (HUD) is the parent of FHA. HUD has created FHA 203k Renovation Loans for homebuyers to be able to purchase fixer-uppers and foreclosures. Homebuyers find a house that is not able to be lived in; what is called “uninhabitable”. They are not going to get a normal or conventional loan on the property. This is because there is no value to it or the “as-is” value is worthless. For any lender in their right mind, lending on that kind of property is way too much of a risk. Seriously, how would they get their money back if the borrower defaults? They wouldn’t get any return on their investment. With FHA 203k Renovation Loans, that’s an issue that gets cared for upfront!
Buying Fixer-Uppers With FHA 203K Loans
There are always issues with fixer-uppers that arise down the line. Using a conventional loan leaves buyers exposed to the nickel and dimes that will ultimately be needed to do future repairs. (It’s more like thousands of dollars) Using FHA 203k Renovation Loans can help make those issues a thing of the past by taking them off the table or calendar of repairs that will most likely be needed. FHA 203k Renovation Loans is designed to get that out of the way right away. Cheaper now vs. Expensive later. Think about how much it costs to repair a roof. Just the repair, later on, could be in the thousands. If you finance it through a consumer finance deal and can’t pay the “special terms” that offer 90 days same as cash kind of deals that are out there, you are laden with heavy interest.
Mortgage Rates On 203k Versus Regular FHA Loans
With the FHA 203k loans, the interest stays lower to where you’re talking about the difference between fix now with FHA 203k Rehab Loan and maybe pay $50/mo more versus financing later with the larger interest and pay more like $200-$300/month. It just makes economic sense. Equity anyone? ANYONE? What’s the difference between the appraised value of a cheap home versus the finished value? Could be huge.
FHA 203k Loans Enables You to Buy Fixer-Uppers In Expensive Areas
Think about it, you find a cheap house that needs some fix-up, and you get an FHA 203k Loan to get the work done needed. Then have it appraised. Guess what? The value will have gone up substantially in many cases. Remember, you picked this piece of junk up for almost nothing. (This depends on your negotiation skills of course) . Now after using a FHA 203k Rehab Loan to get it fixed up, the new value will most likely have increased a lot. I know of people that could have sold their house the day they moved in just because of that major increase in value. When do you want that dream home? If you have a family and a busy work schedule, you do NOT want to be moving into a construction zone. Just not fun. Get Qualify For FHA 203k Loans
FHA 203k Loans Will Get You A Brand New Home With A Lot of Home For the Money
You get to move into a home that is fully project completed. The professionals helped make it happen and it ends up looking like one of those “fix it up” shows from HGTV. What a relief to know your dream home is waiting. The bottom line is, that an FHA 203k Rehab Loan can help you get a dream home with some value in place that will allow you peace of mind in what you will hopefully have as a residence for many years to come without all the headaches of the constant fixing. Sure you can do smaller projects to enhance, but let a 203K loan help really drive the main project and get the house finished.
FHA 203k Loans With No Lender Overlays
Homebuyers of fixer-uppers can contact us at GCA FORUMS Mortgage Group at 800-900-8569 or text us for a faster. Or email us at gcho@gustancho.com. GCA FORUMS Mortgage Group has a national reputation for not having any overlays on government and conventional loans. We are known as the number one mortgage lender with no overlays. GCA FORUMS Mortgage Group has closed more FHA 203k loans with credit scores of under 600 FICO than any mortgage broker, banker, or mortgage banker in the U.S. We can go down to a 580 credit score on FHA 203k loans.
About The Benefits of FHA 203k Loans
Dale Elenteny is a senior loan officer at GCA FORUMS Mortgage Group. Dale is a senior loan officer and associate contributing editor of GCA FORUMS Mortgage Group. Dale helps with training and quality control of all licensed and non-licensed mortgage personnel at GCA FORUMS Mortgage Group. Dale Elenteny is also a staff mortgage and real estate news contributing editor for GCA FORUMS NEWS. Dale is a licensed mortgage loan originator himself. Dale holds his SAFE ACT NMLS state licenses in multiple states. His responsibilities include his clients do not just close, but close on time by making overseeing his borrower’s files are submitted and processed properly.
This Article Was Written By Dale Elenteny of GCA FORUMS Mortgage Group on September 4th, 2024. Click here to Contact with Our Experts for Your FHA 203k Loans Enquiry
FAQs on FHA 203k Loans
For homebuyers eager to buy a home that needs some renovations using an FHA 203 (k) loan, here are some of the most common questions and their corresponding answers:
What are FHA 203k Loans?
Answer: An FHA 203(k) loan is a reform, self-sustaining, self-recovery, or housing plan designed by the government to provide dwelling owners with double financing. One loan amounts to the purchase of the dwelling, while the other encompasses all renovations or repairs within it. It is great for buying mostly repairable homes.
What Kinds of Repairs do FHA 203k Loans Cover?
Answer: FHA 203k loans can cover several repairs, such as Structural Repairs. This includes work on the foundation, roofing, and load-bearing wall constructional objects.
- Upgrading: Such changes will require a newly designed kitchen, building bathrooms, and new rooms or extensions. Energy Efficiency: Green energy practices, panels, windows & doors, or all energy-efficient appliances.
- Outside Changes: New carpet and paint, landscaping.
- Health and safety: Resolution of code, plumbing, electrical or HVAC violations. However, major luxury items such as pools, outdoor kitchens, and hot tubs are rarely included in the coverage.
How Do Standard 203(k) Loan and Limited (Streamline) 203(k) Loan Differ?
Answer:
Standard FHA 203k Loans
This loan is taken for more than $5,000 in repairs, as it can cover large renovations and structural changes. There are no types of repairs that are capped; however, the loan has to comply with the FHA county loan limits.
Limited FHA 203(k) Loan (formerly Streamline)
This loan is geared towards low-cost renovations and decorative repairs that do not change a building’s structure. The upper limit is $35,000 for less complicated repairs, such as redecorating, changing floors, or replacing outdated appliances.
Who is qualified to take FHA 203k loans?
Answer:
- Primary Residence: The property must be owner-occupied for FHA 203(k) loans. Loans cannot be advanced on second homes or investment properties.
- Down Payment: A 3.5% down payment is normally the minimum on FHA loans, with a credit score requirement of 580.
- Some lenders will often want a higher score (around 620).
- However, if your credit score is less than 580, it is required that you provide a down payment of at least equal to 10% of the overall purchase price plus renovation cost.
- Income: Your debt-to-income ratio (DTI) is limited by FHA qualification criteria. If it is more than 43%, it can be difficult to get or service such a loan since it is common practice to maintain a DTI of no more than 43%.
How Much Can One Estimate Borrowing with FHA 203k Loans?
Answer: The maximum borrowable amount would depend on the local FHA loan limits. The loan amount may be as high as 110% of the home’s estimated worth after rehabilitation but not more than the local FHA limits.
Can FHA 203k Loans be Availed for Purchase and Home Refinancing?
Answer: Yes, using FHA 203(k) loans, homes can be bought, and existing mortgages can be refinanced with extra money for improvements. If the house is already owned, an FHA 203(k) loan can assist in getting additional funds for repair work.
What Procedure is Adopted When Using FHA 203k Loans in Home Renovation?
Answer:
- Contractor: It is a requirement to hire a licensed professional contractor (also for repairs). In addition to the FHA’s requirements, a HUD-approved consultant has to be hired to monitor Standard 203 (k) mortgages.
- Appraisal: The appraisal is made as to the present worth of the property, although renovations will be done only in the future.
- Escrow Account: The cash available for the renovations is transferred into a segregated account, and some of this amount is paid to the contractor only after certain conditions are satisfied.
During the home remodel, the homebuyers will have to coordinate the timeline for the home repair and direct the contractors on the work done at a particular time.
How Long Do I Have to Do The Renovations?
Answer: In most cases, you must complete renovations within six months of the loan’s closing. Depending on the urgency of the project and its scope, the work will commence shortly after signing the contract with the contractor. Getting all the work done on time is advisable to maintain all FHA working guidelines.
With a 203(k) Loan, Can I Do the Renovation Myself?
Answer: In general, no. Most FHA 203k loans necessitate that third-party contractors do the project. On rare occasions, borrowers who are licensed contractors themselves may be allowed to do some of the work. Still, a borrower should have all appropriate authorization from the lender and show that he can do the job in the required time.
Are There Costs to Consider When Taking an FHA 203k Loan?
Answer: Yes, There are extra costs associated with the FHA 203(k) products as opposed to the traditional FHA loan options, which include:
- Contingency Reserves: A certain amount of money is also set aside to protect the finances against any contingency, like unforeseen repairs or spiraling costs. This reserve is generally 10% to 20% of the overall expenditure of the renovation exercise.
- Appraisal Fees: You will incur an expense for this special appraisal in which the appraiser estimates the home’s value after the renovations.
Which Properties Can You Borrow Under FHA 203k Loans?
Eligible Properties Include The Following
- 1-4 family homes, Single Family Detached (1-4 units).
- Condos (Only interior work such as repairs and the condo will be approved by FHA only).
- Residential and commercial property composed structures.
- Houses that are being taken down or will be, provided that the base of the old structure still exists.
However, once the renovation is done, such properties must also pass the basic property health test.
Can FHA 203k Loans Be Used to Purchase a Foreclosed Property?
Answer: Yes. A foreclosed property is considered an acceptable form of collateral under FHA financing, a 203 (k) rehab loan, as long as the renovation makes the property suitable for human occupancy. Potential homeowners commonly obtain 203(k) loans to fix homes facing or already in foreclosure and thus need extensive repairs.
What is the Interest Rate for FHA 203k Loans?
Answer: FHA 203k loans generally have slightly higher rates than FHA standard loans. This is because of the extra risk associated with funding the rehabilitation of the house. Rates may also differ depending on the credit score, the lender, and the economy in general. It is advisable to check out several offers to get the best one.
How Do I Apply for an FHA 203k loans?
Answer:
- First step: Look out for any HUD-approved lenders giving out FHA 203K loans.
- Second step: Become pre-qualified so that you have an idea of how much you can borrow.
- Third step: Arrange for a general contractor, if necessary, a HUD-approved consultant, and beyond this, work out a detailed scope of work and cost estimation.
- Fourth step: Complete your loan application and include all the necessary documents, including, but not limited to, the scope of work, cost estimates, and contractors.
What Will Happen if I Overrun My Budget with the Renovation That I Set with a Certain Estimate?
Answer: The contingency reserve can account for unforeseen circumstances if the renovation is over budget. Suppose the reserve for such expenses was budgeted to be low. In that case, there are two options: either add money from your pocket or revise the construction overhaul to what is financially necessary. It is possible to avoid overspending on a budget, especially if you cooperate with your contractor and make everything go according to the budget.
The most fitting loan for home buyers who wish to buy a potential fixer-upper and do renovations would be the FHA 203(k) loan. After going through this article, you should be able to estimate the applicability of the loan for any of your home buying and renovation requirements.
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