FHA 203K Loan: Purchase & Renovation Mortgage All in One
The FHA 203K Loan is financing with all the fixings! FHA 203K loan is a renovation mortgage where you can get the money to purchase a home and the money needed to repair, upgrade or remodel that home, all in one loan at a great rate! Have you identified the ideal location in Gainesville, but can’t find the perfect house? A renovation mortgage might be perfect for you. Find an imperfect home in that ideal location and make it perfect with an FHA 203K Streamline Loan.
How does an FHA 203 Streamline Loan Work?
The FHA 203k streamline loan is probably the most flexible and extensive renovation mortgage available. It will allow you to close on a property and do the work the work within 3 months after closing. As with any home purchase, it is important to consult a mortgage consultant or apply online to obtain a pre-approval before you even make an offer. The amount of your pre-approval should be the purchase price of the home plus the cost of the renovation, less any down payment you plan to make over 3%.
Once your offer is accepted and you have made application for the FHA 203K loan, the first step is to get a quote from a licensed contractor. Many people tell us they prefer to do the work themselves, but this is not possible with a renovation mortgage because compliance requires a licensed contractor. A general contractor can give you a single quote which is a lot easier than using multiple contractors. Your contractor will need to use a 203K Quote Form because we will need specific information that is required by the underwriter. After the quote has been done the appraisal needs to be ordered. We will supply this quote to the appraiser and he will appraise the house as if the renovation is complete. This is called a “subject to” appraisal. Once we have this value, then the loan amount can be properly estimated for the loan application. All this needs to be done before a renovation mortgage can be submitted to underwriting. The appraisal will be reviewed and the repairs will be analyzed by the underwriter to make sure they are compliant. When you get to closing the only thing that is different with the FHA 203K Streamline loan is that a chunk of money will stay in escrow. Half of the remodel cost will be paid to the contractor at closing and the other half will be held in escrow until the appraiser inspects the completed work. You have 90 days to complete the work so make sure the contractor knows that. Any remaining amount of money left in escrow for overages that isn’t used will go towards paying down the balance of the loan. Because of the extra time it takes to obtain quotes and the subject to appraisal that are necessary for underwriting an FHA 203k loan, it is a good idea to ask for 60-90 days for approval and closing. Closing costs on a renovation loan will also be a little bit higher due to re-inspections and a couple of extra title charges.
What kind of improvements or upgrades can I make?
Improvements made with an FHA 203k Loan can include anything from basic repairs or upgrades such as appliances, flooring, a/c, or roof to more extensive renovations like a new kitchen! Here in Ocala we have several foreclosures that have been damaged. You can use an FHA 203K Streamline Loan to make the necessary repairs. You can more or less do anything you want with the property except for anything that would be considered a luxury item, like a pool or an addition. Most people do the windows, roof, drywall, bathrooms, flooring, kitchens – that kind of thing. But you will have a hard time including that giant built-in fish tank you always wanted in your home office. The minimum amount allowed for financed repairs is $5,000, and the maximum amount is $35,000. However, with all renovation loans we must allow a contingency for overages, so really the maximum amount allowed for repairs is $31,500. Your Landmark Mortgage Planner can help you figure out exactly which repairs can be financed on your FHA 203k Loan.
What are the Qualifications?
You need to be a pretty strong borrower for an FHA 203k Streamline loan. The minimum credit score is a 660 for the program, and some lenders require even higher. You may also find that the debt to income (DTI) ratios are little tighter than normal, with a cap around 45% of your gross income allowed for your total debt. Your Landmark Mortgage Consultant can help you figure out the details. One warning with the FHA 203K Streamline Loan: You also will have to be ready to be pro-active with the whole process, because you will be the one to get the general contractor to the home and to provide the 203K quote sheet within a reasonable amount of time. If you plan to get more than one quote, which is a good idea, you will really have to be on top of the situation to make sure we get the quote early enough to hit your contract deadlines for approval and closing. Apart from a higher credit score needed for the FHA 203k loan and slightly tighter debt ratio, all other FHA guidelines will apply (which you can read more about here). The bottom line is a the 203k renovation loan is a great tool, but it’s important that you meet with a mortgage professional early on so you can really understand the program and enjoy the whole process the way you should.
The Conventional Renovation Loan as an Alternative – HomeStyle Renovation Loan
Sometimes buyers want to do more extensive renovations than those allowed on the FHA 203K Renovation Mortgage. That’s when we turn to a conventional renovation loan. The HomeStyle Renovation Loan can be used at the time of purchase or in a refinance transaction to obtain additional funds desired for renovation. The HomeStyle Mortgage can be combined with the HomeReady program, so that low income borrowers can take advantage of the low 3% down payment. Renovation costs are virtually unlimited as they can go to a maximum of 75% of after-enhancement appraised value. In addition, the HomeStyle Renovation Loan can be used to do an addition, add an accessory unit that is even detached from the primary dwelling, landscape the property, and even put in a pool. If you’ve found that “diamond in the rough” and have a vision for making it shine, consult with a Landmark Mortgage Planner about the renovation program that is right for you.