Have Your Cake and Eat It Too
In today’s market there are a large number of homes available to buyers at great prices. Many of these homes, especially if you are looking at short sales or foreclosures need repairs, remodeling, or just updating to fit a buyer’s style or needs. That’s where the problems completing the purchase start to pop up. Generally speaking, we see one of two problems. Either the buyer doesn’t have the cash to make the repairs or update the home after purchase or the repairs are so extensive that they can’t get traditional financing. So, more often than not, they go on down the road and buy something else.
What if, however, there was a loan product out there that would allow them to take advantage of FHA financing and get the money they wanted or needed to rehab, remodel, or update their new home? A little-known program called the FHA 203(k) loan does just that.
The FHA 203(k) loan program allows a borrower the ability to borrow up to the maximum FHA loan amount even if the purchase price is less. The remaining money is placed in escrow for repairs, remodeling, or updating the home. Sounds great, right? So, why haven’t you heard of this program before? Well, there a couple of ways to structure the loan and some general rules that have to be followed. Let’s get started with those because they are pretty universal.
Rules of the Road
Regardless of the type of 203(k) loan you choose, the following rules will almost certainly apply:
■One of the biggest drawbacks is that it takes a full 45 days to process the loan. That’s 45 days from the day you turn in everything you need to your lender. You will need that written into the contract.
■FHA requirements for loan qualification are still in place. That means that credit scores, ratios, etc. have to fall in line.
■The loan must be on your primary residence. No investors as of this writing. That being said, I have heard that the topic of opening this to investors is going to be discussed as a means of reducing the inventory of foreclosures flooding the market. If this policy changes, I will be sure to make you aware.
■To take advantage of this program, buyers have to hire a specially trained inspector to go over the plans, assess the feasibility, and make sure the the After Repairs Value (ARV) is in line with the loan program.
■While you can act as your own general contractor, if you don’t have experience in construction it is highly recommended that you hire a general contractor to do the work.
■All repairs must be completed within 6 months of the loan closing.
■There are two draws on the escrow account during construction. One is at 50% of completion and one at the end of construction. The FHA will make two inspections prior to the draw to make sure that the work is being done according to plan.
■Your real estate agent plays a pivotal role in this process because the lender will likely rely heavily on him/her to provide solid comps of the ARV.
Two Paths
Streamlined
The Streamlined 203(k) loan allows a buyer to borrow the purchase price of the home plus an additional $35,000 for repairs. Generally speaking, even if you are not going to have $35,000 in repairs, it is recommended by most that you skip the streamlined 203(k) and opt for the regular. The reason why is that once your amount is submitted with the loan package, that’s it. If you get into your project and realize that you need more money, you are out of luck.
Regular
Unlike the Streamlined 203(k), the regular version allows you more money for your repairs and considerably more flexibility. Using the Houston market as an example, you could buy a $100,000 home that needed considerable work, and as long as the ARV was in line with comparables, you could borrow an additional $170,000 for repairs. Additionally, let’s say you get into your project and realize that your new home had termite damage and needs $4,000 in additional repairs. As long as you don’t break the maximum loan amount allowed by FHA, you can go back and readjust your loan amount to cover the unforeseen expense. Because there is no difference in the application process or processing time, it is generally recommended by most experts to go this route no matter what.
Also Available for Refis
One attractive aspect of the 203(k) loan is that it is also available on refinance loans. So, if you’ve been thinking of doing a refi on your home but would also like some money for a covered patio or just some updates, this could be the right thing for you. Of course, the ARV must appraise, but if the numbers work then the 203(k) could be the answer you’ve been looking for.
Conclusion
The FHA 203(k) loan isn’t for everyone, but for the right buyer who is looking to make repairs to a home they are purchasing it can be a very attractive option. Between the low down payment, access to large amounts of rehab money, and flexibility in the regular program there is the ability to buy low, fix the home up, and still have a nice equity position in a home. If you’ve been looking for a home to fix up and call your own, the FHA 203(k) could be right for you. To visit the FHA’s web site and learn more,