THE FHA
203K PROGRAM
What makes The FHA 203K Loan different?
The FHA 203K loan enables homebuyers and
homeowners to finance both the purchase (or refinance) of a house and the
cost of its rehabilitation through a single mortgage - or to finance the
rehabilitation of their existing home.
One Loan
in two parts: The first part of the loan pays the seller; the second part is put
in an escrow account to be used as you do the renovation / rehab work! In
the case of a refinance, the first part pays off your mortgage, and again,
the second part is put in the escrow account for your use. How long do
you have? SIX MONTHS.
In the case of a
purchase, that is six months after you go to settlement on the home.
Why would you need
ONE loan in two parts?
Let us look at the
person who already owns the home.
If you
already own a home that needs repair:
Most Lenders
will not let you refinance until all the needed work is completed.
However, you need the money as the work is being done.
In the case
where your home doesn’t need repair, but you wish to do some
modernization, or renovation; many people choose the 203K.
The FHA 203K loan is
the only loan that allows us to APPRAISE your home, AS IF ALL THE
RENOVATIONS ARE COMPLETED!
Question:
Since my home
is now appraised for more, can I increase the amount of money for my repairs / renovations AFTER I begin doing
some of the work?
NO! You have to decide in the beginning
what work you want to do and stick with it. Money not used, can be
allocated elsewhere, only with a written change order request
Perhaps
the house you wish to purchase is NOT a handy man special; it just needs a
new roof, and some new windows. Most Lenders still must
have the work completed BEFORE a permanent mortgage will be approved. The
property must meet their “good shape” requirements before the loan is
made. But, this is the reason you are getting the house at such a good
price; the seller does not have the money to do the repairs.
The FHA 203K
loan allows you to purchase the home “in its present condition,” and
then do the needed repairs in the Six months following. All the money for
the needed repairs is included in your new loan, and waiting for your use in
your escrow account.
example:
You can buy the house for $75,000 because it needs a new roof and new
windows. The roof and windows will cost $9,000. All
the houses in the neighborhood are selling for
over $95,000 in good condition.
What a good deal you
found, after the work is done!
|
The
fellow that owns his own home is always just coming out of a
hardware store. ~Frank McKinney Hubbard |
The
FHA 203K Loan is just what you needed!
Most properties
that you will want to use the FHA 203K loan are eligible for the program.
There are however, some restrictions:
The home must be a 1-4
unit. As an example, if the house you are purchasing is a duplex (2units),
it must be a legal 2 family house, and you must be moving in one of the
apartments as your primary residence.
If the house is more than 4 units, then it is considered Commercial Real
Estate and not eligible. However, if under the 203K loan, you are
putting two of the apartments together (most likely for yourself), and
making the 5 unit into just a legal 4 unit, the property would be eligible.
Properties
that have some portion being used for commercial use, can be an
exception where you can still use the 203K loan. FHA restricts the
commercial use to 25% of the building. You can use the 203K to renovate
/repair ONLY the non-commercial area; and you must also be moving
into the non-commercial area as your primary residence.
While Co-ops are not eligible, CONDOMINIUMS are eligible.
However, the
condominiums do have some restrictions. Each building of the condominium
(if more than one), may only have a maximum of 4 units. Another condominium
restriction is that the 203K repair or renovation can only be done on the
interior of the unit.
Properties
that have been demolished, or are being razed are also eligible,
provided
that some of the existing foundation remains in place!
The FHA 203K is not a
construction loan, it is for repair and / or renovation. Therefore,
the
house must be a MINIMUM OF 1 YR OLD!
Question: Can I add a
detached Garage to the house?
Yes. However, any other
new dwellings must be attached to the residence
WHAT CAN BE REPAIRED
/ RENOVATED UNDER THE 203K?
There is
no longer a Minimum amount of money to be used for Repair/
Renovation.
Basically, the 203K money can be used for all items that affect the
permanent enhancement and improvement to the property; and yes, the 203k
money can be used for most minor and cosmetic repairs and renovations.
There are only two considerations:
1. value of the home WHEN completed
2. pure Luxury items are excluded
A short list of ideas:
(This
list is not all inclusive.)
A. Structural alterations and
reconstruction (e.g., repair or replacement of structural damage,
chimney repair, additions to the structure, installation of an additional
bath(s), skylights, finished attics and/or basements, repair of termite
damage and the treatment against termites or other insect infestation,
etc.).
B. Changes for improved functions and
modernization (e.g., remodeled bathrooms and kitchens, including
permanently installed appliances, i.e., built-in range and/ or oven, range
hood, microwave, dishwasher).
C. Elimination of health and safety hazards
(including the resolution of defective paint surfaces or lead-based paint
problems on homes built prior to 1978).
D. Changes for aesthetic appeal and
elimination of obsolescence
(e.g., new exterior siding, adding a second
story to the home, covered porch, stair railings, attached carport).
E. Reconditioning or replacement of
plumbing (including connecting to public water and/or sewer system),
heating, air conditioning and electrical systems. Installation of new
plumbing fixtures is acceptable, including interior whirlpool bathtubs.
Question:
Can I
totally Rehab the entire house under FHA 203K or HomeStyle?
Yes. You are only
limited by your loan qualifications and the area loan
limit. The HomeStyle
limit is now at 417,000
CONTINUING... ACCEPTABLE ITEMS
F. Installation of Well and/or Septic
System. The well or septic system must be installed or repaired prior to
beginning any other repairs to the property. A property less than 1/2 acre
with a separate well or septic system is not acceptable; also, a property
less than one acre with both a well and a septic system is unacceptable.
Lots smaller than these sizes usually have problems in the future; however,
there are exceptions for smaller lot size requirements where the local
health authority can justify smaller lots. The installation of a new well or
the repair of an existing well (used for the primary water source to the
property) can be allowed provided there is adequate documentation to show
there is reason to believe the well will produce a sufficient amount of
potable water for the occupants.
G. Roofing, gutters and downspouts.
H. Flooring, tiling and carpeting.
I. Energy conservation improvements
(e.g., new double pane windows, steel insulated exterior doors, insulation,
solar domestic hot water systems, caulking and weather-stripping, etc.).
J. Major landscape work and site
improvement,
(e.g. patios, decks and terraces that improve the value of
the property equal to the dollar amount spent on the improvements or
required to preserve the property from erosion). The correction of grading
and drainage problems is also acceptable Tree removal is acceptable if the
tree is a safety hazard to the property. Repair of existing walks and
driveway is acceptable if it may affect the safety of the property.
(Fencing, new walks and driveways, and general landscape work (i.e., trees,
shrubs, seeding or sodding) cannot be in the first $5000 requirement.)
K. Improvements for accessibility to a Disabled Person
(e.g., remodeling kitchens
and baths for wheelchair access, lowering kitchen
cabinets, installing wider doors and exterior ramps, etc.).
Question: I presently own a rancher, can I add a complete
second story and a garage?
Yes,
your new Colonial will be worth a great deal more than just the cost
investment
The following costs can ALSO be included, and NOT considered to
be Luxury Items :
·
New free standing range,
refrigerator, washer and dryer, trash compactor and other appurtenances.
(Used appliances are not eligible
·
Interior and exterior
painting.
·
The repair of a
swimming pool, not to exceed $1,500.
Repair costs exceeding the $1,500 limit must be paid into the contingency
reserve fund by the borrower.
The installation of a new swimming pool is not allowed.
Luxury items and improvements that do not become a permanent part of the
real property are not eligible as a cost of rehabilitation. The items listed
below (not limited to this list) are not acceptable under the 203(k)
program, including the repair of any of the following: Barbecue pit;
bathhouse; dumbwaiter; exterior hot tub; sauna, spa and whirlpool bath;
outdoor fireplace or hearth; photo mural; installation of a new swimming
pool; gazebo; television antenna; satellite dish; tennis court; tree
surgery. Additions or alterations to provide for commercial use are not
eligible.
Now
that we know what we can do, how do we get started?
Two things are needed before we proceed with our plan:
1. an idea of how
much money we will need for the repairs /
renovations.
2.
will the house be worth at least what we are putting into
it, added to the sales price (or when added to
the existing mortgage, in the case of a
refinance)?
Question: Will I have to put out any money to get started?
Yes. The
consultant, the appraiser, and the termite report need to be paid up front
So, We need to have
some idea of the money we think we will need; and, we need to
believe that it is worth the trouble of doing the work.
example:
We are getting a great deal on a house for $70,000.
We think we will need about $30,000 for everything
Are we sure that the house WILL be worth at
least $100,000 WHEN FINISHED?
The
203K program allows : up to 110% of the value of the house. But, costs
are associated with getting a 203K loan; there may be permits to purchase;
drawings for large jobs; and room for a Contingency.
Therefore, the program
calls for you to put at least 10% EXTRA into your loan as a RESERVE, in
case something comes up that was not planned for in the beginning. If
you end up NOT needing it - great; at the end, it is applied to your loan
balance. But, if something comes up that you did not anticipate, it is
wonderful to have it there!
Some people,
as they get to almost completion, ask if they can use the contingency
for some extra renovation. This is done quite often, and with a simple
written request can be approved quite easily.
So, although
you can go to 110% of the value of the house, the property should at
least be worth what you are putting into it.
Therefore, we
do get an FHA appraisal on the property AFTER we determine the extent of the
work you are going to do to the house.
(for a refinance, we
must get a value for the house before any work is done - since we do not
have a sales price as we do with a purchase).
However,
before we get an appraisal, you must meet with the FHA 203K Consultant at
the property, to determine the “real costs” of the repairs / renovations you
have in mind. It is a good idea to have your contractor out there too!
You will also need to have a termite certificate with you; if there are any
termites, and especially termite damage, you want the cost to be included in
the 203K money!
Question: Who gets the appraisal and contacts the FHA
Consultant?
The
Loan Officer contacts the Consultant &, our processor, the appraiser.
| A man builds a
fine house; and now he has a master, and a task for life: he is to
furnish, watch, show it, and keep it in repair, the rest of his
days. ~Ralph Waldo Emerson |
The FHA 203K program is not intended as a Cash-out Refinance. There is only one time
that you may receive money, in your hand, for anything but for
planned work, already completed:
If you just purchased the home with cash,
in the past six months, and now you wish to repair / renovate. In this
case, you can be reimbursed for the cash you spent when you purchased it, and
still put the money you need into an escrow account for work you want to
complete in the next 6 months!
The FHA 203K
Consultant will prepare a Work Write-Up and Cost Estimate for
you! Each item that you wish to do to the house will be shown with regards
to quantity and cost. However, there are many other items that can be put
into the Work Write-Up, that you may not have considered: The cost of
the Consultant, for one! The cost of the Appraisal, any
Architectural Plans you may need, a plot plan of the site, if you are
putting on a new addition, permits and licenses you may need.
If the house you are
purchasing needs work, BEFORE YOU CAN EVEN MOVE IN, you may finance
up to six months of mortgage payments! This allows you to stay in your
apartment until the major repairs / renovations are completed!
Question: What is the
advantage/disadvantage of using the HomeStyle rather than 203K?
The advantage
is in the higher allowed loan amount ($359,650); the disadvantage is 5%
downpayment, which can not be a gift.
How and when do you
receive the money set up in the Escrow Account?
Unlike a construction loan, the 203K program has NO
specific draw requests schedule. Anytime you feel a sufficient
amount of work is completed, you may ask the FHA inspector to come in and
release funds to be withdrawn from your escrow account, for work
completed! The draw release can ONLY be for work that was on
the initial Work Write-up.
Money can NOT be
released “to get a contractor started!”
The work MUST BE
COMPLETED for a draw request to release funds.
We can make an exception
for money to be released for kitchen and bath cabinetry, or floor coverings,
where a contract is established with a supplier and an order is placed
with the manufacturer for a delivery at a later date.
Each time a
draw is requested, the inspector MUST go out to the property. We can finance up to 5 draw requests; you can request more
frequent draws, however, the costs of the draws over 5 is an out of
pocket expense.
| One only needs
two tools in life: WD-40 to make things go, and duct tape to make
them stop. ~G.M. Weilacher |
WHO CAN DO THE WORK?
All work
must be done by your contractor. In fact, when you release a draw
request, the draw funds is made out to BOTH you and the Contractor.
Therefore, do not sign the draw request, unless you are satisfied with the
work done!
Remember:
The lender nor the FHA is
responsible for the contractor that you have chosen. It is your
responsibility to check out their license, especially when you are hiring
electricians, plumbers, roofers. etc. Please do not ask us to recommend
any contractors, as that is beyond our scope of expertise. We can not be
responsible, or a party to any agreements that you enter into with
individual contractors.
Question: What if I don’t like the work that my contractor is
doing?
Do not sign for the release of funds. Immediately
make the FHA inspector and the contractor aware of your dissatisfaction;
the contractor fixes the problem or you hire a new one. Do not continue
releasing funds for work with which you are not satisfied!
