FHA203K loan are of different types depending upon the extent of repairs needed It is a convenience offered to avoid a two-way process of buying a mortgage which will be followed by a home equity line or cash out refinance to fund necessary improvements. It is a beneficial loan for existing homeowners. Besides they can avail funds for temporary housing funding which could be in the form of rent for the period, that the house is under rehabilitation and also for those who improve their homes to increase the after-improvement value of the property, in case they have limited equity.
The families who are found vulnerable to such loans are mostly in low to moderate income brackets and belong to old communities. The amount borrowed covers purchase price of the home, cost of renovation which is inclusive of all the materials as well as the hired labour. The FHA 203 K loans which are backed by the government provide reassurance to lending institutions because the mortgage package includes the cost of renovating the fees provided to the contractors is from an escrow account and is delivered to the particular contractor when the work is completed. However, the completion of renovation must not take more than six months. The FHA 203 k loan is a dual purpose loan which eliminates the need of applying two separate times for a mortgage and a loan for renovation which may come at a higher combined cost or may or may not be approved by the bank.
These loans are also covered under fixed rate or adjustable-rate mortgage normally the lenders are unwilling to offer a mortgage for a property in need of major repairs due to their safety and livability standards.
There are two types off 203 Kay loans- limited 203k and standard 203k. The real estate investors and the house flippers do not qualify for such loan as it is only for families who would tend on making the property, on which renovations are going to be carried out, as their primary residence.
As the name indicates it is the loan type which is applied for when minimal repairs are at hand and not much work is required. It is also called as streamline loan. The world minimal repairs exclude structural work on the home like adding new rooms or landscaping and the home can be occupied during renovation. The loan amount in limited type of FHA loan is capped at $35,000.
It is easier to avail. No contingency reserve is needed to be projected. The borrower must occupy the property within 30 days of closing.
Opposite to that of minimal repairs, extensive repairs like working on the structure of the house falls under standard 203 k loan, also called full 203k loan. Here the minimum cost of improvement is at $5000. The jobs or repairs under this type of loan include flooring, re-modelling ,heat and air conditioning systems, adding rooms, window and door replacements, implementing access tools for disabled person,etc.
Renovations which are extravagant and luxurious like tennis courts, new swimming pools etc. fall out of the provision of FHA 203 k.
Being a major renovation, HUD approved 203 k consultant may be required to supervise the project from start to finish, review proposals and inspect the work to release funds to contractors. These consultants might charge fee varying from $400 to $1000. Another feature associated with such bigger loans is a contingency reserve which is the money which is kept aside for unanticipated additional coverage. The standard 203 k loan allows for up to 6 monthly mortgage payments included in the loan.
It starts off like any other mortgage application. The borrower must qualify for a home loan based on certain requirements credit scores, income, and employment proofs. Important note is that FHA is not a lender rather it is a mortgage insurer. The borrower is required to get bids for the work which are needed to be completed on the property. In case of a full 203 k loan, consultant is selected by the lender who works with the borrower to determine the needs, requires home inspection to address health, safety needs, determine borrower’s demands. So it is also a good time to estimate the market value of the property.
Once the proposed changes have been completed, if everything goes well, the loan is underwritten the home is passed and an as- is value and after improvement value is noted and eventually funded. After completion of the work, verification by the consultant or the inspector, the remaining funds are released. Beginning with within 30 days of loan closing the project must be completed within six months period.