Renovation and Home Loan all in one.
Overview of the FHA 203(k)
The FHA 203(k) is a loan available to owner-occupants of homes that are in need of repairs (to meet minimum property standards set fourth by HUD), or homes that are to be updated by the new buyer/owner. One single loan is given to the buyer/owner, this loan will cover both the purchase price or existing lien and the proposed improvements. The maximum loan will be determined by the value after improvements. All the repairs are performed after the loan is closed, (this means on a purchase your commissions are paid at loan closing.) The seller is never responsible for the repairs; all homes sold under this program can be sold “As is.”
How are the funds disbursed at loan closing?
Basically, there is a single loan that consists of “two different buckets of money.” The first bucket of money is filled with the funds to payoff the purchase price or existing lien; the second bucket has all of the rehabilitation funds (these funds are held in escrow by the lender). The rehabilitation funds are released on an as-finished basis; meaning contractors are reimbursed after they complete their work. Funds are released in draws; there is a maximum of five draws per property.
How does the basic loan process flow?
Once a home is targeted by a buyer/homeowner, this person must perform a feasibility analysis. Three basic pieces of information must be gathered: the amount of the purchase price or existing lien, the amount of rehabilitation needed, and the anticipated after-improved value. Once these three items are provided, a HUD trained inspector (known as a consultant) walks through the property and determines the dollar amounts that will be allowed for material and labor (minimum of $5000). This report (known as a Work Write-up or Specification of Repairs) will be given to an appraiser. The appraiser will appraise the house assuming all repairs are complete and determine an estimated after-improved value for the home. The buyer/owner will be allowed to finance 110% of the estimated after-improved value. This amount cannot exceed the maximum loan amount set by HUD for the county that the property is located in. The remaining processing of the loan (verification of funds, credit and employment) follows normal FHA guidelines.
How is the down payment determined?
On a purchase down payment is determined based on the total of the purchase price, plus the total amount of rehabilitation.
What properties are eligible?
Any property that will be a properly zoned 1-4 unit dwelling, in its after-improved state, is eligible for a 203(k). Another requirement is that either the existing structure or foundation must be at least one year old. With this program, six-unit homes have been split into two different three-unit mortgages.
Please call if you have any questions regarding eligible properties.
Highlights of the 203(k)
· 100% gifts allowed (including down payments/closing costs).
· Contingency funds in case of cost overruns.
· Only need a foundation to qualify.
· Place new house on old foundation.
· Make homes handicap accessible if desired.
· Only 25% of the foundation need exist to qualify if certificate of occupancy has been previously issued.
· Move existing house to a new foundation.
· Any property where the local building department has issued a “Certificate of Occupancy” is eligible.
· Finance up to 6 months of mortgage payments.
· Split multi-family housing to 1-4 units properties with 1-1/2” firewall.
· New appliances can be included.
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