Focus On Financing

The FHA 203k Rehab Loan – What You Need To Know

 

WHAT IS AN FHA 203K HOME LOAN?

The FHA 203k rehabilitation loan allows you to finance the repair or renovation costs into the loan. This is able to be done because the lender will manage both the mortgage and repairs within the loan at the same time.

WHEN DO I RECOMMEND USING A 203K LOAN?

  1. When the home is being sold “as-is” typically from a bank as an REO or short sale property, and is required to sell without repairs; or, the home is aged and in poor shape .
  2. The home must be purchased “as is” (due to the request of a seller or market conditions) and would not pass the appraisal inspection for a Conventional or regular FHA/VA home loan
  3. When the home buyer(s) simply do not have the available funds, apart from their down payment to make the repairs or upgrades 
  4. When a homeowner is in need of home repairs, but may not qualify for a traditional Cash-Out refinance
  5. When a buyer may have limited buying power and may only qualify for a “fixer upper”

203K HOME LOAN ELIGIBILITY:

As I mentioned earlier, the 203k loan is essentially an FHA mortgage. FHA qualifying guidelines (with a couple additional requirements) will still apply:

  1. Must be owner-occupied (cannot be used on a flip or investment home)
  2. Minimum 620 credit score (can make case-by-case exceptions down to 580)
  3. Minimum down payment of 3.5%
  4. FHA mortgage insurance is required (monthly .85% w/ 1.75% upfront MI premium fee)
  5. Can be used on a multi-family home (duplex, triplex…)
  6. FHA county loan limits apply (max loan amount $379,500 San Bernardino/Riverside County)
  7. Seller can pay up to 6% closing costs
  8. You can borrower up to 110% of the future appraised value
  9. Gift funds allowed for down payment and closing costs

HOW TO WRITE YOUR 203K OFFER (IMPORTANT-REAL ESTATE AGENTS):

One of the most common mistakes (misunderstandings) is how to write your offer and structure the repairs **Into** the transaction. Here’s a short overview:

The strucuture of the contract will remain the same with the exception of a couple of items. Simply put, write the offer like you would normally write it when there is a regular FHA loan. Make sure you note that a FHA 203k loan will be used as financing. It’s important to always look to make sure that the price of the house is not at the top end of the market because remember that this program will only allow finanicng up to 110% of the future after-repair-value (APV). If the price is already capped and the property needs a lot of repairs guidelines will not be met.

WHAT REPAIRS CAN I DO WITH A 203K LOAN:

Before getting into the allowable repairs, it’s important to know that there are 2 types of FHA renovation loans. The first and most common is the Streamline version which is used for cosmetic repairs and improvements and will allow costs of up to $35,000. The second is the Standard version which is used when there are structural changes and for projects higher in costs, exceeding $35,000.

The allowable repairs for the “streamline” program are:

  • Painting
  • Energy-efficient upgrades
  • Windows
  • Roof replacement
  • Carpet and flooring
  • Appliances
  • Repairing health and safety issues
  • Kitchen and bathroom remodels
  • And more…

Please note: The limit to costs is $35,000 for the streamline 203k loan program. However, FHA requires a buffer equal to 15%-20% of the bids. This “buffer” is to create a contingency fund to cover overages that you may encounter. If the contractor remains on task with the bid(s), then you get a refund of the 15% buffer. So with the 15% buffer factored in, the “real” maximum amount of repairs that you can finance is $31,000 (not $35,000).

THE 203K LOAN PROCESS

(1) Apply for a FHA 203k loan – Apply Here

(2) Complete 203k intro packet/meeting with Steve

(3) Get underwritten approval

(4) Find a contractor w/ FHA 203k experience (should be licensed, bonded, insured)

(5) Get bids, submit to Steve and Team

(6) Order the appraisal (a “subject to” appraisal is made)

(7) Close the loan (you get keys!)

(8) Complete repairs (within 6-months)

(9) Move in! (entire process can take up to 60-days, 45-days is common)

If you are a Real Estate broker, I am happy to show you how this program can add tremendous value to your business. If you are a consumer, let’s connect and talk about your goals as well as your options. There are other renovation programs in addition to the FHA 203k loan.

As with anything, it is important that you are working with a professional. Let my Team and I walk you through this process. It can be stressful and take longer than conventional financing, but education and communication is key!

I WANT TO BE YOUR MORTGAGE ADVISER!

I LOVE connecting with my social media followers and readers! You are the reason I take time out of my day to produce this content and share it with you as often as I can.  I can always be reached directly at 951-662-3389 or via email at stevec@focusonfinancing.net. 

If you found this information valuable, please share it! If you are a real estate broker and would like more information don’t hesitate to call me to set up a one-on-one meeting. 

 

To apply for a loan click here and follow up the prompts. 

October 25, 2017 by · Leave a Comment

About Steve

Steve is an experienced Sr. Loan Officer & Mortgage Planner located in Rancho Cucamonga and serving the Inland Empire and surrounding areas. Steve prides himself at being transparent with all his clients using sophisticated tools and concepts to make sure the right program is chosen. Call Steve Chavarria at 951-662-3389.

Leave a Comment