Demystifying FHA 203k Loans for Buying and Renovating Your Home Simultaneously

FHA 203k Loans

It is a natural tendency for prospective homeowners to look out for the property in the best condition. However, it may be appreciated that such properties tend to be more expensive than houses that are run down because most people are really not interested in buying such properties, as they require more work after purchase before you can move in. However, a savvy real estate investor will tell you, these dilapidated properties can deliver a really high return on investment by making relatively minor improvements in a short time leaving you with a property that you can immediately sell or live in for many years. While you can finance such a property acquisition in a variety of ways, an FHA 203k loan can save you a lot of effort in because these loans allow you to not only acquire the property but to make improvements on it. Some essentials of FHA 203k loan described:

What Is an FHA 203k Loan and What Can You Do with It? 

There are many properties that are in a very good location but need improvements to be made before they can be occupied. Without investing in the repairs not only will the home not be habitable but also it can be very difficult to find a lender willing to finance the purchase. An FHA 203k loan in such a situation is a close-to-perfect solution since the loan amount is insured by the Federal Housing Authority (FHA) giving lenders the necessary confidence to make available the money required to purchase and renovate the property. The FHA encourages such purchases because an uninhabited property is transformed into a home, taken off the market, and again made a valuable part of the community. 

Are All Properties Eligible for FHA 203k Loans?

Yes, all properties that are in need of repairs to ensure proper safety of mechanical and structural items, as well as the health of the occupants, are eligible for an FHA 203k Loan. According to https://www.thebalance.com, the minimum amount that can be borrowed is $5,000 and the maximum limit is as set by the Department of Housing and Urban Development. For 2019, the maximum amount set for high-cost metropolitan areas was $726,525 while for areas that have lower costs of housing the limit was $314,827. While the huge difference in these limits is intended to accommodate different market conditions, generally, the loan limits are set at 115% of the county’s median home price. The inclusion of the median price in the formula is a deliberate attempt to make customers consider modest purchases, not extravagant ones. The FHA 203k Streamlined Program can be used if the loan amount for repairs is less than $35,000. The advantage of this is that there is no need for an inspection by a 203k inspector; however, the lender may require either a feasibility study or a work write-up according to 203k lending norms, depending on the extent and nature of the repairs.

What Are the Costs Associated With 302k Loans?

The interest rate on a 203k loan can be either fixed or variable depending on the options given by the lender and your own preference. With a fixed rate, you will have the comfort of knowing how much to pay every month. Generally, these loans can have a tenor of up to 30 years. These loans will normally be offered to you at a premium of 1% over and above the normal rates applicable to you based on your credit score and other factors. However, when you consider that you are getting a combined loan that allows you to buy and renovate your property and the processing is faster due to the backing of the FHA, the interest rate is justifiable. The best way of getting the lowest rate is to shop around. In addition to the interest, you will need to pay for the feasibility inspection, which can cost you around $350. Draw inspection cost around $250 and a full work 203k write-up can cost in the region of $400-$1,000 or for larger properties, up to 1% of the construction cost. Fortunately, all these fees can be added to your loan amount being allowable expenses.

How Is the Property’s Appraised Value Determined?

Before agreeing to extend a 203k loan, a lender like Liberty lending will invariably ask for the appraisal of the property in its current condition. For the appraisal to be done and the determination of the ‘as completed’ value, the appraiser will require a copy of the 203k Specification of Repairs. Since the loan approval is subject to the 203k inspection, it is better to get it done as quickly as possible to avoid undue processing delays. The HUD recognizes that distressed properties often need a lot of rehab work so it permits the loan value to be the purchase price of the property plus 110% of the appraised value to allow for repairs. Ideally, you should obtain an estimate of the repairs according to the requirements of the FHA; the 4350 you spend on a feasibility study is well worth it, as it will prevent a lot of headaches in the future. 

Why Is a Contingency Fund Required? 

When you are purchasing a distressed property or a property that has been foreclosed, there is a good chance that the estimate of repairs will not be able to include unforeseen items that come to light after the renovation has commenced. Since nobody desires the project to be stalled for want of funds, both the lender and the 203k inspector will request a margin of at least 10-15% of the total expected repair cost to be added to the loan amount to meet unexpected costs.

How Is the Contractor Paid?

The contractor appointed by does not get any upfront payment. All the payments are made after the 203k inspector performs an inspection and signs off on the completed work. The draw request report is prepared by the consultant and signed off by him, your contractor, and you for processing by the lender. The disbursement is normally made within one week of submitting the report to the lender. It is important that both you and the contractor are aware that 105 of the draw amount is held back till the final inspection and released only when the inspector certifies that all the work has been completed to satisfaction.

Conclusion 

FAH 203k loans are a very useful way for homeowners to acquire properties that need substantial renovation before they can be occupied. The 203k loan provides money for the home purchase as well as the repairs without unnecessary paperwork in a streamlined way. 

One Thought to “Demystifying FHA 203k Loans for Buying and Renovating Your Home Simultaneously”

  1. alvinaclair

    Great article. It is very useful and this is the basic knowledge that everyone must know about home loans and home improvement loans. Thanks for sharing.

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