One of the greatest benefits of a federally-backed mortgage is the variety of programs offered to single-family borrowers. FHA-approved lenders handle the operation of these programs and fund the mortgages that the department insures. If you need to remodel a home you wish to purchase or already live in, then an FHA 203k loan is what you are looking for. This section functions as a vital tool for community renewal and greatly increases homeownership opportunity.
How Can You Use Your FHA 203k Loan?
This program can be used in combination with other federal mortgage products. HUD’s HOME, HOPE and Community Development Block Grant programs are some excellent options for assisting families in remodeling their homes. State housing finance agencies have also designed some of their resources specifically to be used in conjunction with a 203k. Many lenders utilize local housing expertise and nonprofit organizations to assist homeowners in the rehabilitation process.
The administration sees this program as its main resource for building up the quality of life in low-income communities. Lenders who participate are showing their dedication to the improvement of their country and the betterment of their fellow man. If this is not motivating enough, there is always the Community Reinvestment Act (CRA) and its responsibilities that all loan officers must satisfy. In fact, the FHA 203k loan works well with all CRA-type lending services.
These loans differ from other federal loans in that they allow the applicant to receive temporary financing on a home that does not meet the typical housing standards. If this was done with a traditional mortgage, the homeowner would have to go through several different mortgage processes, paying high interest rates with short amortization periods. This government program was created to allow borrowers to get all the financing they need in one step. The mortgage amount is calculated using the projected value of the home after repairs are made, taking into account the necessary expense. As soon as the proceeds are disbursed and the rehabilitation escrow is established, HUD will endorse the total allowable loan amount, protecting the lender’s interests.
There are certain standards the home must meet to be eligible for this type of loan. It must be a one to four family property that has been in place for at least one year. Only one building is allowed; units that are not attached are not eligible for the loan.
Homes that are demolished or will be in the process of reconstruction are eligible as long as their foundation remains intact. A multi-unit property may be converted into a single up to a four-family home. An existing house or modular unit may be transferred to the property, as long as the foundation is inspected and the home is properly secured.
Properties that are used for both commercial and residential purposes can qualify if no more than 25% (for one story), 33% (for two stories), or 49% (for three stories), of the building is commercial. The rehabilitation funds cannot apply to the commercial area, and the health and safety of residents cannot be affected by the mixed use. This mortgage service may also be used for individual condominium units as long as the project is approved by the agency.
There are also strict requirements for the repairs performed. Luxury-type amenities are not eligible for an FHA 203k loan. Health, safety and energy conservation adjustments must take priority over general home improvements, such as painting, room additions and decks. The following renovations are required for all qualifying projects.
New construction must comply with local building codes and the administration’s property standards. To improve thermal efficiency: weather stripping is applied or replaced on all doors and windows; all openings, cracks or joints are caulked or sealed; all openings in exterior walls and ceilings are insulated; all attic and crawlspace areas are adequately ventilated; and heating, ventilating and air conditioning ducts and pipes are properly insulated and carefully sized. It is also required that at least one approved smoke detector be placed adjacent to every sleeping area.
The remainder of the 203k guidelines is very similar to those of any federal loan program. Appraisal reports must be completed, maximum mortgage amount is determined and proper documentation is gathered and verified. A particularly vital item for qualification is a detailed architectural proposal describing what improvements will be made. This includes a plot plan of the site, a proposed interior plan of the dwelling, and a work write up and cost estimate breakdown. As this is the most important and most complicated aspect of the loan process, many homeowners choose to hire a professional architect or consultant to prepare this report.
The Federal Housing Administration offers many resources to help potential homeowners improve their homes and therefore their communities. With so many options and lots of people ready to help, the daunting task of rehabilitating a severely damaged home becomes completely doable, maybe even enjoyable! With an FHA 203k loan, there is no doubt that you will enjoy the fruits of your labor.
Other options for a refinance loan other than an FHA 203k loan and mistakes to avoid.