Want to add value to a home? Some of the best bargains are properties in need of repair. The FHA 203(k) mortgage includes the cost to purchase or refinance and make repairs in one loan. This allows home buyers to borrower more than the sales price in order to make repairs if value increases. Borrowers are guided in the process by a certified consultant.
Since the mortgage is government backed, credit terms are more flexible and loans are allowed up to just over 95% of the property’s after-improved value. These loans offer competitive interest rates.
FHA Lending
The Federal Housing Administration (FHA) guarantees mortgage loans. Borrowers not eligible for non-government, also called conventional, financing may be eligible under FHA’s more flexible underwriting guidelines. FHA also allows the seller to pay a part of they buyer’s costs, allows down payment assistance from family, close friends or nonprofits, and has competitive interest rates.
The minimum borrower investment of 3.5% is a welcome contrast to the up to 20% some conventional loans require. The loan can also be used to refinance owner-occupied properties. The 203(k) loan is no longer available for investors.
The 203(k)
The FHA 203(k) offers the following advantages:
– Repairs are included in determining the after-improved value. The maximum mortgage is based on the home’s value after improvements are done;
– HUD Certified Consultants oversee home improvement from cost estimating to inspections. Contractors sign a written agreement to comply with 203(k) requirements. Changes to approved work, if any, must be deemed necessary by the HUD Consultant and approved;
– The lender’s escrow department disburses funds only after work is completed and inspected;
– Borrowers can finance up to six mortgage payments if the property is uninhabitable during renovation;
– The escrow department will ensure there are no mechanic’s liens before final payment is made to the home improvement contractor.
Disadvantages:
– FHA loans charge mortgage insurance upfront in addition to a monthly premium;
– Contractors are paid after each stage of work is finished, usually in three to five installments, so they must have their own funds to get the work started in most cases;
– Underwriting can take longer due to the need for coordination between homebuyer, contractors, the Consultant, and special renovation lending teams;
– An extra appraisal and a HUD Consultant fee must be paid upfront. That is an $800 to $1,500 additional expense.
Finding a Lender
Since so much is involved, be certain your lender is familiar with 203(k) requirements. Ask your Mortgage Loan Officer for details. You can visit HUD’s website, http://www.hud.gov, and search “find a lender.” Be sure the 203K box is checked on the Lender List page.