Almost everyone knows about FHA mortgages. They are tailor-made for first time homebuyers and others with less than perfect credit or other financial issues. You don’t have to be low income or have bad credit to use FHA, but generally the loan limits prohibit high priced homes.
What you may not know about FHA is that there is a special loan program designed to provide the funds to buy or refinance your home PLUS additional funds to make repairs or improvements.
This FHA mortgage is called the 203K and the K is the operative part of the name. Not every lender participates in the rehab loan program, but the major national lenders do. If the loan officer you contact is unaware, then call the corporate office and ask them to direct you.
The FHA 203K loan program calls for an FHA inspector to go over the house, using the plans you gave him. Before you get to this inspection phase, you should be working with a general contractor who understands how to provide plans and specs for a project. Plans and specifications are standard in the contracting industry for anyone managing a project >$5000, which is the minimum rehab amount for this loan program.
The FHA inspector will decide if the project is feasible, depending on whether there is additional work required to bring the property up to code, and whether or not the property will appraise for enough to make the project “worth it”. FHA is willing to lend based on the after-rehab value and will even stretch that value a little in order to get houses brought up to code.
Once the lender is happy with the valuations, the plans and specs, and the inspector’s report, your loan file will be reviewed by an underwriter specially trained and certified in rehab loans. Your credit and finances do not have to be perfect to be approved, but the creditworthiness and qualifications are similar to a regular FHA loan.
One of the benefits of a 203K is that all costs can be added into the project. The fees, permits, closing costs, etc. are all added up and your down payment on the purchase is calculated on the total. If you are refinancing instead of purchasing, the amounts are totaled the same way, but you might already have enough equity in the home to avoid coming up with any cash.
What’s next? Once approved, the loan closes and the rehab portion of the money is escrowed by the lender. The contractor submits requests for payment and each phase is inspected. As soon as the work passes the inspection for completion, the contractor is paid. You can not go back to the well for more money, so your initial plan must be a good one. A contingency fund is usually added in during the total project calculation.
This contingency fund can only be used to fund hidden repairs that were not evident during the initial workup. Any remaining funds in the contingency are used to pay down the mortgage at the end of the project.
The FHA 203K mortgage is not a “piece of cake”, but if you do not qualify for low cost money at the local home improvement equity loan bank, then it is very definitely worth looking into.