Finding your dream house can be a big challenge. You could pay a higher price to buy the perfect property. That could be too expensive plus you could encounter intense competition for the best homes. Another, possibly better, choice could be to buy a house and do some rehabbing. Without the ready cash, it will require mortgage financing. The rehab loan, also known as a 203k loan, can help you with that renovation and home repair you might need.
Most mortgage loan programs will not finance homes that need significant repairs. In this situation, a rehab loan, the 203k loan, can make this possible.
What is a Rehab Loan?
A rehab loan, also known as an FHA 203k loan, is funding that can finance both the home purchase and renovation costs. These home repair loans have attractive rates for buyers.
The FHA (Federal Housing Administration) insures 203k loans. The renovations and repairs need to meet FHA and the lender’s standards.
Home repair loans, such as FHA loans, require that financed properties meet minimum standards to provide a specific quality of living. If you choose to hold out for a near-perfect house you could encounter a fierce bidding war. Houses that need some work will be ignored by many buyers. This means less competition and potentially a lower price, even when you consider the repair costs. This also gives you more choices for your new home to fit closer to your dreams.
Backed by the Federal Housing Administration, rehabbing a house with a 203k loan comes with FHA support. Qualifications for a 203k loan are more lenient. These more relaxed financial underwriting standards provide you with the opportunity to purchase a home in a better neighborhood, plus renovate it more to your desires.
Transforming a fixer-upper house into your dream house will take more work. Thorough planning and construction are essential. The approval of this renovation loan is only the first step.
Types of Rehab Loan
Rehab loans, the 203k loan, comes in various forms.
Your Real Mortgage Consultant will need to work closely with you on your home rehab plans. While home repair loans provide dream home possibilities not available with other loans, they are more complicated, so do not fail to take advantage of all the assistance your Real Mortgage Consultant can offer you.
Part of this plan includes determining your compatible type of rehab loan. A written list and estimates of the repairs will be necessary to help you decide on your type of renovation loan.
Investigate these home repair loans.
Streamline Rehab Loan/Limited Rehab Loan
A streamline or limited rehab loan is a type of renovation loan covering non-structural repairs. This renovation loan funds up to $35,000 but not for major structural repairs. The home must be habitable during the work. This loan can be used for the following:
- Bathroom and kitchen renovations
- Electrical work/projects
- Flooring & carpet
- Appliances replacement
- Energy-efficiency upgrades
- Roof replacement
- Well repair/septic system repair
- Health & safety repairs
- Asbestos removal
- Mold abatement & termite repairs
Standard Rehab Loan/Full Rehab Loan
A standard loan is one of the home repair loans that cover structural repairs. Compared to the previous one, the standard type offers higher loan limits. And it offers at least $5,000 and at most $50,000 to fund projects.
The maximum loan limit of the standard rehab loan depends on your area. You can check the loan limits in your area here. The maximum repair amount must be less than the FHA loan limits for the area.
Here are the allowed repairs and changes for the standard loan:
- A portion of the existing foundation system
- Room additions
- Water or public sewer connection
- Work on damages from natural causes
- Accessibility improvements (e.g. compatible for disabled persons)
- Home conversion from one unit to multiple-unit home
- Landscaping projects
- Site moving of the house
Some renovations and repairs are not eligible under this mortgage. Check with your Real Mortgage Consultant for advice you can depend on. Many improvements using this loan are possible except for permanent and luxury renovations.
What Changes are Not Eligible for this Loan?
These 203k loans are excellent for house renovations and repairs. However, luxury upgrades are not qualified for a rehab loan. In addition to that, permanent items attached to the house are also not eligible.
Here are some examples of these upgrades that are not eligible:
- Swimming pools
- Barbecue pits
- Tennis courts
- Minor landscaping
- Satellite dishes
- Saunas, spas, & exterior hot tubs
- Outdoor fireplaces
- Upgrades to use the property for commercial use
Renovation projects that will take more than 6 months are not eligible for funding of the rehab loan. Consult your Real Mortgage Consultant for the cold, hard facts.
The Rehab Loan Process
Rehabbing a house will be easier with the 203k loan when you understand the rehab loan process. Lenders and contractors are vital to the process.
Your Real Mortgage Consultant will work with you to process your 203k loan according to our exclusive Winner’s Mortgage Program. These seven 203k rehab loan process steps will be embedded in our Winner’s Mortgage Program.
After approving your eligibility, here are the seven steps.
Step 1: Application
The renovation loan process begins with the application. Work with an accomplished Real Mortgage Consultant to help you focus on what is important. Use the “Get Started” Client Questionnaire to match you with a consultant.
Do I qualify for a Rehab Loan?
Because 203k loans follow FHA mortgage guidelines, qualification is more lenient than conventional loans. Therefore, if you financially qualify for a standard FHA loan, you are likely to also qualify for this renovation loan. More about the requirements can be found on this page.
American citizenship or permanent residency is required. Your status will be verified with the loan application.
HUD (The Department of Housing and Urban Development) sets the qualification criteria for a rehab loan, such as:
- Qualified property to purchase
- Lender requirements:
- DTI ratio
- Credit scores (May allow down to a 580-credit score)
- Proof of income
- Qualified lender
- Promise to occupy the property you are purchasing
Step 2: Approval
The property is reviewed in the approval step. The estimated property price and repair costs will be used for approval. Your Real Mortgage Consultant plays a critical role at this point.
- Breakdown of the loan
- Purchase price
- Repair bid amount
- 203k loans fees
- Final amount
Work with your dependable Real Mortgage Consultant to assist with a detailed proposal tailored to your needs. In addition, you will want licensed contractors to help with the cost estimate.
Step 3: Contractor Search
Contractors have a vital role in the home repair loan process. It’s almost impossible to do it without them. Look for insured and licensed contractors that can complete your project. Also, your Real Mortgage Consultant can recommend some of the best contractors in your area.
Step 4: Bidding & Appraisal
Get official and accurate bids. These bids are necessary for the entire project. The appraiser will use these bids to assist in determining the property value after the improvements.
This value will be stated before and after the project is completed. Be thorough to list the repairs you will complete. Rehabbing a house requires detailed pricing of all repairs to receive an accurate appraisal.
Next, your Real Mortgage Consultant will submit the following information and support documents for underwriting:
- Bid details
- Borrower income
- Borrower credit
- Asset documentation
- Additional information as needed
The underwriter will verify the documentation to approve the project.
Step 5: Closing the Loan
Once all requirements and conditions are met, you can sign the final closing documents.
The lender funds the loan and the closer then distributes the funds. The seller will be paid for the property and the contractor will be paid 50% of the repair costs. And the remaining 50% is held for payment after the project completion.
Funding for 203k loans is processed through an escrow account. The second half of the funds is held in the escrow account until the project is satisfactorily completed. This guarantees the funds will be available for the contractors and the completion of the project.
Step 6: Completing Repairs
The work begins after the closing of the renovation loan and the contractor receives the first half of the payment.
The project must be completed within six months according to FHA rules.
After the second half payment and completion of the project, the escrow account will be closed. All payments are completed, and the loan converts to an FHA 30-year fixed loan.
Step 7: Move-in
Move in and enjoy your dream home made possible by the rehab loan. Live in a house likely worth more than what you paid for it including the rehab. You receive both your dream home and a potentially excellent investment in one transaction.
What factors should I consider when applying for a Rehab Loan?
As you consider a rehab loan keep these factors in mind.
Purchasing and rehabbing a house requires a down payment. The amount is influenced by the purchase price and repair costs.
With a credit score of 580 or higher (varies by lender), a minimum down payment of 3.5% of the total loan cost is needed. The total loan cost includes the purchase price plus the total repair costs.
A credit score between 500 and 579 requires 10% of the total loan cost as a down payment. Home buyer programs can assist with a down payment.
Income & Debt Payments
Your DTI (Debt-to-income) ratio is an important consideration for this renovation loan. Lenders compare your income to your required loan payments. Your DTI should be less than 43%.
Home repair loans can fund up to 110% of whichever is less between these two:
- The appraised future value of the property
- Property prices + project costs
Your total loan amount depends on the FHA loan limit of your area. For low-cost areas, the loan amount is at most $638,100 while it is $1,472,550 for high-cost areas. To be learn the maximum loan amount for your area, check out the HUD site.
Rehab Loan Rates
Rehab 203k loans have a higher interest rate compared to standard FHA loans. Loan interest rates are 0.75 to 1 percent higher than other FHA loans. While higher, this is still considered low in the market compared to other loan interest rates.
Breakdown of Extra Fees
A 203k loan has a few additional fees.
- Contingency Reserve: This covers the potential for any cost overruns. Typically, 10% is set aside. This can go to as much as 20% of the final repair cost depending on the project. It is kept in the escrow account. If it is not needed, the contingency reserve can be used to pay down the loan or for additional work on the home.
- Inspection Fees: In addition to the original appraisal, supplemental inspection fees are required to be sure the work is being done as needed. Estimate about $300 ($150 per inspection). This is two inspections to ensure that FHA standards are met.
- Supplemental Origination Fee: In addition to the origination fee on the full loan (often 1% of the loan amount), a supplemental origination fee is added for the repair and rehab portion of the loan. This totals $350 or 1.5% of rehab costs, whichever is higher. It covers setting up the escrow account and management.
- Title Update Fee: This fee is used to monitor and protect against additional liens being placed on the property due to the rehab work. It can range up to $150.
Advantages and Benefits of Using this Loan
A rehab loan assists you to purchase your home and upgrade it to your desire. Here are some additional advantages.
It offers low down payments and rates.
Rehabbing a house can be expensive, both in time to money. With this renovation loan, you can renovate with less cash on hand. It has attractive interest rates and a low down payment.
It is a sound investment.
You can use this renovation loan to purchase a property and transform it into an investment by increasing its value. This renovation loan does require you to live in the property. That requirement limits the opportunity receive an income stream by renting the property, at least initially. After a year, you do have the option to move or rent the property.
Your most likely return on investment from 203k loans comes by upgrading the property value. Your profit can come from selling later at a higher price.
It provides the opportunity to purchase and renovate with less cash upfront.
Using home repair loans to buy your home gives you a start. It allows payments over time. Of course, this type of payment plan is expensive. It makes the lender wealthy instead of you. Financing gets you started, then you will want to use “Loan Payment Freedom Secrets”, part of the Winner’s Mortgage Master Plan so you WIN with your mortgage and not lose.
It has lenient qualification requirements.
The rehab loan is an FHA loan. The Federal Housing Administration guarantee makes this financing more available to more people since lenders are more willing to offer this guaranteed financing.
It provides you with the flexibility to integrate your own personal style.
In rehabbing a house, you have the freedom to customize it according to your personal style. You can upgrade and renovate the property to your desired appearance, from its flooring to paint colors. You can also integrate your own style in the process.
Rehab Refinancing Loan
A 203k loan can also be used for a refinance. This works for a rehab loan with at least $5,000 of upgrades. The new loan amount will be the existing balance plus the additional repair costs, plus closing costs. The new amount must be no greater than 110% of the property value.
The maximum new loan amount of the rehab refinancing loan is the lowest value among these:
- Current Property Value + Rehabilitation Costs
- 110% of After-improved Value x 97.75% loan-to-value ratio
- Current Property Mortgage + Rehabilitation Costs + Closing Costs
Work with your Real Mortgage Consultant to help you navigate these limits and to help you WIN with your mortgage, not lose like most people lose.
With the rehab refinancing loan, receiving cash out is not an option. This renovation loan requires that all funds that would normally be cash out go to the contractor for the repair costs.
Do you still have queries about this renovation loan that haven’t been discussed yet? Here are the top FAQs to assist you.
What will I do if I exceed the limit for the repair cost?
If you exceed the maximum repair cost for the 203k loan, you may have one available option to go over the limit. If any of your repairs and upgrades qualify in the Energy Efficiency Mortgage program, the total amount of your repairs can be increased, although this amount is limited to $8000. This limit can be subject to change.
If shifting some of the repair expense to the EEM program is not an option, the only choice is to remove repair items to lower the total cost. This program does not allow you to pay the difference in cash.
Can the rehab loan fund a house flipping?
Rehabbing a house is different from flipping a house. Rehabbing means renovating the house you currently own or will purchase so that you can live there. Flipping is a profit strategy of renovating a property to sell it at a higher price.
Home repair loans only apply if you plan to live in the home you wish to purchase and renovate. You must agree to this and sign loan documents that you will live in the property as your primary residence.
How long will I need to live in the house before I can rent it out?
You must to live in the renovated and upgraded property for at least 12 months before selling or renting it out.
Can I do the upgrades and repairs with the rehab loan?
Rehabbing a house will demand specific expertise. Generally, you are not allowed to do the work yourself unless you can prove you are qualified. If you are a licensed contractor with the required documentation then you can work on the project. Lenders will require proof that you work in the trade.
Can 203k loans fund furniture purchases?
The funding from this renovation loan is limited to attached and permanent upgrades. You can buy new appliances, but furniture is not allowed.
What are the forms that I need to be familiar with?
Applying and getting approval for this FHA loan requires filling out forms. So here are the 203k forms. Your Real Mortgage Consultant can help you navigate through these documents:
- HUD-92700 203k Worksheet
- 203k Borrower’s Acknowledgement
- FHA 203k Homeowner/Contractor Agreement, sample
- A list of 203k documents is located here.
Can home repair loans be used for condos?
Home repair loans can also be used for condominiums. But only interior repairs and upgrades are allowed in the renovations. Be aware that only 4 other condominium units in a particular complex can be in process at the same time.
For questions about rehabbing a house and using this 203k loan for funding, contact your field-proven Real Mortgage Consultant at Winner’s Mortgage.
Is the Rehab Loan worth your time?
The rehab loan is a type of FHA loan. And this means that like other FHA loans, qualifications are more lenient. With the FHA guarantee, lenders are given the security they need to fund the mortgage.
Is this renovation loan worth it?
Renovating a fixer-upper house can be a great investment. The cost of renovations and repairs can be low enough compared to the increased value that it can have a good return on your time and your financial investment.
Rehabbing a house, a fixer-upper, is a likely cost-effective way to get your dream house.
Additionally, mortgage loan programs are less available to purchase a house that needs some significant rehabbing. This leaves cash as the only other option to purchase such a property, which is out of reach for most buyers. Therefore, the 203k FHA loan becomes one of the few viable options to take advantage of this opportunity.
Work with your Real Mortgage Consultant and use the 203k loan to get you started with your potential new dream home, then you also get exclusive premium access to the Winner’s Mortgage Master Plan so you can also WIN with your mortgage, and not lose like most people lose, and they don’t even know they are losing.
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