Fix-and-flips are all the rage, but have you ever considered a fix-up to live in? You might be able to find the perfect location an older home that may need more renovation than your budget allows. The answer could be an FHA 203(k) loan. This loan program, insured by Federal Housing Administration (FHA), but placed through participating lenders, is a product which can help you both buy and purchase a home to renovate.
FHA 203(k) is a loan which allows homebuyers to borrow enough money to both purchase the home and have the funding for necessary repairs, including both labor and materials. The end result can be a fixed-up home with a mortgage with a fixed rate for 15 or 30 years or an Adjustable Rate Mortgage (ARM).
Some of the basic framework for the structure of the FHA 203(k) program is as follows:
This type of loan is only for those who will occupy the property as a primary residence after renovations are complete and the loan is closed. It is not available for investors.
One of the good things about FHA 203(k) is that you only need to make one loan application for purchase AND the renovation. The initial funding from the loan will provide the money for the home purchase, and subsequent dispersals of loan funds from an escrow account will pay for the renovations.
The amount which can be borrowed is subject to the FHA loan limit in the geographic area. In Boulder County, the loan limit is $644,000. The other determining factors for the loan size include borrower income, credit, and down payment. The nice part about the down payment is that it is the same as regular FHA financing at 3.5%. You can put more down, but if you have a large sum of cash, you probably will not be looking at this program. The low down payment is made possible by the payment of mortgage insurance, which protects the lender in the event of a borrower default. In most cases the mortgage insurance can be included in the loan.
The loan size is also limited to 110% of appraised value and that amount cannot go over the loan limit for the area. An appraisal is done on the home to determine the home’s value before and after the improvements.
There are two types of FHA 203(k) loans. One is designed for limited repair costs of less than $35,000 and one for extensive projects that are going to cost more than $35,000. Generally, you will have more paperwork to complete than a straight purchase loan, especially if the projects are bigger and are valued at over $35,000.
In most cases, the mortgage lender is will require that the renovations and repairs be completed by licensed contractors, especially for items like electrical and plumbing. Check with your mortgage lender to see if you are allowed to carry out any of the repairs on the list yourself. Timing for getting the work done is critical for FHA 203(k) loans. Renovation work must begin within 30 days of the initial home purchase and closing, then be completed within six months of the original closing.
This loan program is designed to upgrade a home’s essentials such as structural repairs, roofing, flooring, plumbing, health and safety issues, and changes that will improve appearance and obsolescence. Luxury items such as hot tubs, tennis courts, outdoor fireplaces, and satellite dishes won’t be approved items.
It is possible to use an FHA 203(k) loan on your existing home. This amounts to making an application for refinance. Your original mortgage will need to be paid off and you will need to have enough equity to generate cash for the renovations. The cash generated is then held in escrow until the work is completed and the contractors need to be paid.
Closing costs for an FHA 203(k) loan are much like any other mortgage loan. Expect costs such as a loan origination fee, appraisal and inspection fees, title insurance, credit report, and maybe an Improvement Location Certificate (ILC), etc. FHA will require mortgage insurance to be paid both upfront and monthly.
Most any FHA mortgage lender can offer an FHA 203 (k) loan, but in general it is a good idea to pick a lender who has experience with or specializes in this type of loan. It is also a good idea to choose contractors who have had experience working with your Realtor® and your mortgage lender. Together, this team of experts can help you decide if an FHA 203(k) loan is right for you.
By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: The Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail DuaneDuggan@boulderco.com, call 303.441.5611 or visit boulderco.com.