Through the Federal Housing Administration there are quite a few loans available to the average homeowner. The most common of these loans is the 203b; this is the loan given out for most single family residences. Another loan, however, is the 203k. This loan is known as the fixer upper or rehab loan because it is a way for the homeowner to get the funding necessary to turn an old beaten down house into a beautiful, modern home. FHA rehab loans are a great resource for individuals as well as communities; when you fix a fixer upper, you maintain the value and beauty of the neighborhood and everybody wins.
The Ins and Outs of the FHA Rehab Loan
There are two types of repairs that can be done through the 203k loan program: structural and cosmetic. The type is important because it will determine the loan you get. For a standard 203k loan you’ll be looking at a fixer upper home that needs structural repairs. This could include foundation and roofing, additional rooms, bathroom and kitchen remodels, disability access, and on and on. The list is pretty extensive, but a good rule of thumb to consider is that it cannot be used for extravagant improvements. You can’t put in a swimming pool with a 203k loan.
The loan is helpful because it enables you to purchase the property and cover the cost of repairs all with one mortgage payment. Typically, a rehab loan is given out in one of two ways. You’ll either get the amount of the value of the home plus the estimated cost of repairs, or 110% of the estimated value of the home after repairs. The exact number will need to be determined by your lender.
FHA 203k loans are available for more than just single family homes. You can acquire one of these loans for the purchase of a condo, a multi-unit structure up to four units, a home that needs to be moved, or even a mixed use property. The only requirement is that you will have to live in the home you are repairing. However, even this has a loophole. If the home will be uninhabitable during the renovation period, there can sometimes be a clause put into the loan that allows you to make your rent payments through the money you’ve acquired for the mortgage on the fixer upper. This way you aren’t splitting your focus, but are working toward getting your home completed. While this particular FHA rehab loan is typically used for homes that need major repairs there is another, similar option that can be used if you’re only in need of a cosmetic touch up.
The Streamline 203k
For fixer upper situations where there isn’t any structural work involved, a better option than the standard FHA rehab loan might be the streamline 203k. This loan is unique in that is works as an extension of your home loan and is paid with your regular mortgage payment, rather than having two separate payments. It is also unique because it can make the mortgage loan more than the value of the home. For example, if you own a home that values at $150,000 but needs $30,000 in repairs, you can get a regular mortgage for the $150,000 and a streamline for the additional $30,000. This would then be more than the value of the home, but despite that, you could still get approval. There is a maximum loan amount with the streamline option – up to $35,000 – which isn’t in place with a regular 203k, but for cosmetic work or a room remodel, it is definitely worth doing.
With an FHA 203k there is a lot more paperwork involved than there is with a 203b and you will be required to work more closely with your lender, especially when it comes to getting the job done. You will also need to hire estimators and contractors to make sure the home stays within the budget limits that have been determined through the appraisal and the loan. You may be able to do some of the work yourself, but you will have to go over that with your lender. It’s important to note that not every federally approved lender is willing to work with rehab loans, so you will want to make sure your lender has made rehab loans one of his areas of expertise. It’s a good idea to get referrals or find reviews on a lender before you sign on the loan.