If you are watching Buy a house that requires a lot of work, you may be able to get it for a discounted price. However, the cost of short and long term repairs can break your budget.
That is why the Federal Housing Administration 203 (k) loan may have something to consider. This allows you to combine home purchase and renovation costs into one loan. After completing the renovation, you will have created immediate equity based on the increased value.
While there are fewer lenders who offer government-backed loans due to additional monitoring and paperwork, here’s a look at how these loans operate and why it may be worth the extra legwork to find one.
203 (k) What are the types of loans?
The loans, officially called 203 (k) rehab mortgage insurance, allow homebuyers to finance the cost of the purchase as well as renovations to a loan or homeowners to rehabilitate their current home.
Loans can be particularly attractive to first-time homebuyers as credit scores and down payment requirements are more lenient than most traditional loans. If you have a credit score of more than 580, you can purchase and renew up to 96.5%. If your score is between 500 and 579, then your down payment should be at least 10%.
In addition, if homebuyers need some work before the house moves in, the loan will get them to customize their home the way they want, says Brad Smith, director of special products at the mortgage lender guarantee rate And gives a chance to personalize. “
There are two types of 203 (k) loans:
Limited. The loan allows up to $ 35,000 in financing for nonstructural repairs and upgrades, and there is no minimum amount you need to borrow. The money can be used to repair a property or to prepare a home for sale. Examples of upgrades would include a kitchen remodel or new carpeting. You will not be able to do a major renewal with this loan.
standard. A wide range of remodeling options are possible with this loan, including structural repairs. It requires a minimum loan of $ 5,000 to repair. It should also include a 203 (k) advisor who will work with the lender and borrower. There is no specific dollar limit on the loan, but may not exceed the FHA mortgage limit for the combined home purchase and renovation loan sector.
With a standard 203 (k) loan, part of the loan goes to the home seller to pay, and the rest is held in an escrow account to pay for repairs.
Steps required to obtain a 203 (k) loan
If you are interested in a 203 (k) loan, then your first step will be to find a lender who offers one. Not every lender offers an FHA loan, or, if it does, the lender may not offer the 203 (k) option. Check out the Department of Housing and Urban Development Lender search, Which will give you a list of all lenders who have offered 203 (k) in the previous year.
You will work with the lender over the next few steps, as you review what needs to be renovated on the home and determine the loan size and the scope of the project.
Inspections are important for homes purchased with a 203 (k) loan because you must identify the necessary health and safety upgrades as well as other updates that you want to make. You must bring in a HUD-certified inspector to meet FHA standards.
Smith says, “The ideal process is to involve that HUD consultant to conduct a reverse inspection on the property to identify all the repair items.”
The duties of a certified consultant include visiting the home, detailing the work that needs to be done and inspecting.
Smith said “it is important to organize all the home repairs required for the inspection” because you have only one chance to do it. After initial funding you cannot add money for additional repairs. If you want to reclaim project money to repay for a health and safety, once renovations begin, it can take out money for something else, such as a bathroom upgrade, he adds .
Get an estimate and hire a contractor
Smith said use consultants’ reports to get bids from contractors. You will usually hire a general contractor who can work with as many subcontractors as needed to get the job done, or you can hire individual specialized contractors such as a roofer, plumber and electrician.
“You need to hire someone who understands the type of renovation you’re doing and has done so in the past,” says Ron Heaney, Senior Vice President of Mortgage Finance Policy for Independent Community Bankers of America. Ho.
The types of work to be done with a 203 (k) loan include:
- Addressing health and safety issues
- Putting in a new roof, gutters and downspots, or adding them
- Floor space
- Making structural changes or rebuilding parts of the house
- Permission for better access for a person with a disability
- Improve energy conservation
- Landscape work
- Home modernization and appearance improvement
Once you define the scope of the renovation, the lender will appoint an FHA-approved approver who estimates the value of the home based on the completion of all repairs and upgrades. The value will either be the value of the property before rehabilitation or the value of 110% of the value of the renovation after renovation, or whichever is less.
An appraisal that is much higher than the current value of the home indicates that the repairs will pay for the homeowner. If you buy a home that needs a lot of work in a neighborhood that has excellent homes and makes necessary repairs, you can create some equity for yourself after closing, Smith says.
Once the price is determined, the money reserved for renovation is established in a custodial bank in the name of the borrower, Smith says. Distribution is made to the contractor as the work is completed and inspected. The amount will also include a contingency reserve, which can be around 10%.
If more problems are found in the home, then reserve funds are important.
“When you go into it, you’re thinking one thing,” Heaney says. “This will change as the project progresses, and you need to be prepared for it. This means you may need to have more reserves on hand.”
If the work at home is so extensive that you cannot live in it during renovations, you will be able to finance mortgage payments for up to six months so that you do not have to pay for your current home and new one at the same time, says Heaney Huh.
Why is a 203 (k) loan a good idea?
For homebuyers, a 203 (k) loan can take care of two issues at the same time – buying a home, and planning and financing a renovation that will have to be done immediately after moving in.
In a tight housing market with older homes, 203 (k) loans can broaden the types of homes that buyers can buy. Otherwise, it is hard for new homeowners – especially for the first time – to come in with money to make repairs after they move in.
Smith says, “The use of credit cards and other means can make it difficult for homeowners to finance. He says that it can take you longer to repair and repair a home once. With a 203 (k) loan, You can get them all in advance.
Are there other options for a renewal loan?
If you are a first-time homebuyer, you may be stuck in a renovation like HGTV for a home purchase plan, but moving to your new home can be overwhelming when dealing with a major remodeling project.
“Anyone who does any renovation to their home quickly realizes the project goes beyond what you thought it would.” “When you start breaking down the walls, you’re going to find all kinds of stuff that changes your original plan.”
One option some lenders would prefer for a 203 (k) loan is a separate, dedicated construction loan that funds for renewal. For example, community banks make a lot of construction loans and can keep the loan in their portfolio, which gives the borrower more flexibility, says Hanney. A separate construction loan also allows homeowners to avoid FHA regulations – including payment of home mortgage insurance during the loan. Because you do not need to start renovation from now on, you will get time at home to find out what exactly you want to change.
A major refinance, rather than a 203 (k) refinance, is another option for homeowners who want to pay for a major renovation. Heaney says that a bank can arrange a cash-out refinance with homeowners and help them manage the payment process for the project.
Householders who do not want to refinance:
- Take out a home equity loan Or get a home equity line of credit. If you have sufficient equity in your home, this may be an ideal option due to the current low interest rates. Interest can also be tax-deductible.
- Open one personal loan. Interest rates are generally higher on unsecured personal loans than on home equity loans, but this is a good option if you do not have enough home equity, but can handle monthly payments.
Whether you are a prospective or current homeowner, you may find a major renovation to be very expensive. Many homeowners have decided to expand their current homes to get additional space for offices and other needs, increasing the price for workers and materials, Haiya says. The best option may be to buy a house that has everything you want beforehand.
“Look at all your options,” Heaney says. Ask yourself, “What do I really need to get out of this renovation, and is it worth it?”