The many uses of FHA 203K loan to improve a home
With more and more properties on the MLS being a distressed property and for those buyers utilizing an FHA loan, who may find themselves making an offer on a property that may need some TLC, they can utilize a companion loan called the FHA 203K.
Typically, the FHA borrower may not have sufficient funds set aside to deal with repairs, hence this program is available for those specific needs.
Here is an excellent post by a fellow blogger and Mortgage Broker, Bill Ladewig, discussing the multiple uses of the FHA 203K loan. A great product
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Rebuild this home with a FHA 203(k)
One loan finances the purchase and improvements. The FHA 203k includes the cost of rebuild, rehabilitation or home improvement in a purchase or refinance loan. .
The 203(k) is a great marketing tool for real estate agents that provides added value.
While it is a great tool to rehabilitate trashed REOs it also can be used to upgrade homes.
The primary criteria are: the improvement is a permanent part of the real estate and the improved home’s value must be comparable to similar homes in the neighborhood.
There are many uses for the 203(k)
- Rebuild
- Rehabilitate
- Remodel kitchens and bathrooms or…
- Add Rooms
- Move homes to new lots. •
- 203k cannot be funded until home is permanently secured to new foundation.
- Start with an existing bare foundation and build a new home.
Underwriting guidelines for borrower are the same a regular FHA
- Must be owner occupied
- There are no borrower income limits.
- No purchase price restrictions
- Subject to local FHA loan limits.
- Borrower’s minimum investment is 3.5%
FHA 203k are not overly complicated.
The final loan amount will be 96.50% of the purchase price and cost of repairs plus a contingency pad
The purchase contract is written based upon the purchase price. I suggest, to avoid seller confusion, the purchase offer loan amount to be 96.50% of the purchase price with a notation the loan amount will be increased based upon repair costs.
Once the offer is accepted repair bids are prepared by licensed and bonded contractors. If the bids are over $35,000 a FHA 203k inspector must review the property and bids; below $35,000 no FHA inspector is required.
- Purchase price plus construction costs CANNOT exceed the value of comparable homes in the area.
- The contractor must understand the bid must be accurate because there will not be any additional money available.
After the construction bid is accepted, it along with the purchase contract is sent to the FHA appraiser.
The time to complete a FHA 203k is dependent on the time required to prepare the construction bid. Once the construction bid is accepted the time to close is the same as a regular FHA loan.
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What to do when an FHA buyer needs additional funds to to repair work?
As everyone knows, the volume of FHA loans funding first time home purchases has increased dramatically in the past two years. It went from 3% to about 50% of the mortgage market today. It is a great product for first time home buyers who want to capitalize on the current first time homeowner tax credit offered by the government.
However, because the down payment requirment is 3.5% of the purchase price, many buyers who use this product often have limited access to additional cash that may be required to address some of those unforeseen situations that sometimes arise when purchasing a home. This is especially true when they are trying to compete on multiple offer situations and they need additional funds to later for repair work. From my own experience, most FHA buyers walk away from certain homes they like because they simply do not have funds for repair work.
However, this does not necessarily have to happen. What their agents are failing to inform them is, there is something called a FHA 203(k) loan which was designed specifically with this type of need in mind. The 203(k) is a repair program which can be rolled into one single loan. It is the lifesaver for those who want to buy a home that may require repair work.
I am a real estate expert, so I will not get into the specifics of this loan product, but a good loan agent should be able to explain thing in detail about this wonderful product which escapes the radar of many home buyers. If you are in Silicon Valley and don’t know a good loan agent who can explain this useful product to you, then contact me and I can set up introductions.
