Buy AND Renovate with One 203k Loan
Did you know that you can get a mortgage that will help to finance repair or remodeling costs? It’s called a FHA 203k renovation loan. (Even homeowners can refinance and renovate with this loan.)
This 203k loan is a great option for those of you who don’t have a lot of cash and want to buy a home that needs work.
Let’s Do the Math
With a 203k loan, the total acquisition cost = the sales price + the total cost of renovation .
And that total cost is what your mortgage will be based on. The overall loan cannot exceed 110% of the after-improved value of the home. Also, the required down payment is 3.5% of the total acquisition cost. After your closing, the total funds required for the renovations are held in an escrow account by the bank and are released as the work is completed.
Fix It Up — What’s Eligible
The 203k loan covers a wide range of repairs. Major jobs — a kitchen remodel, new roof or adding a second story — and more cosmetic upgrades — replacing carpeting, new windows or new deck — are eligible. The extensive list also covers repairs for termite damage, mold problems and other safety issues.
If the home doesn’t have air conditioning, don’t worry, this loan will cover it. Even energy conservation improvements such as insulation or new energy efficient appliances are eligible.
The renovations, however, must include all mandatory repairs required to allow the property to meet FHA guidelines.
Timeline — First Things First
You’ll have several steps to take to get this loan but is well worth the effort. First, you’ll need to get prequalified to see how much you can borrow. Once you make an offer on a home, you’ll get a ratified contract allowing 45-60 days for settlement to allow you to finalize renovation estimates with an approved contractor.
You’ll meet with a HUD consultant for a feasibility study. You then need to provide an itemized list of all the work to be done with a cost estimate for each item. The lender will get an appraisal on the home based on these improvements.
There are several other charges that will be added to the renovation costs and included in the acquisition cost. In addition to the contractor’s cost estimate, a 10‐20% contingency reserve is required. In addition to the contingency reserve, inspection fees, title updates, permits and consultant fees must all be included.
You’re on Your Way!
Once the loan is approved with the final amount, the contractor has 30 days to begin work with a maximum time frame of 6 months. A HUD consultant will inspect the work as it is completed and will let the bank know to release the funds each time. Any funds left over are used to reduce the principal balance.
The 203k streamline version is a simplified version of the regular 203k. It can be used for renovations not to exceed $35,000 including contingency, inspection and title update requirements. The streamline is perfect for smaller projects that do not include any major remodeling.
It is also simplified because it does not require a HUD consultant and only has two fund draws. The first 50% of funds is released 30 days post settlement and the remainder of funds is released once a final inspection is completed by the FHA appraiser.