by DEAN HARTMAN Whether you’re looking at a foreclosed home, bank REO, a Short Sale or really any home, you need to be aware of the FHA 203K Program. The general condition of real estate has taken a dip over the past few years, as homeowners are not sprucing up their home as they have in the past.
(Pssst…there’s a recession going on…people are afraid of losing jobs…and they believe they won’t “get back” the money they spend by renovating upon sale).
The 203K loan can be used for small repairs (with a minimum of $5000 of work) such as a new roof or replacing the boiler. It can go all the way up to practically rebuilding the home and anything in between. Maybe you love a home, the neighborhood, etc., but you hate the kitchen cabinets. The 203K may be for you. As long as the existing foundation stays intact, we can talk about any type of repair, upgrade, modernization or expansion.
With one closing, we will give borrowers money to satisfy their contract with the seller AND establish a Rehab Escrow Account to fund the agreed renovations. The Rehab Escrow Account is managed like a Construction Loan. Money is released after work is completed, the property is inspected by the lender and the title is updated.
Like all FHA loans, the property must be owner occupied and loan approval requires full documentation of income, assets and credit worthiness. At the same time, underwriting guidelines have some flexibility built in. (In theory, we can lend up to 110% of the After-Improved Value of the home for example.)
Loans are processed in the same fashion as any other loan (in terms of income, asset and credit) with the exception of the appraisal. Appraisers work in conjunction with the home improvement contractor and a HUD Approved Pre-Planner to determine: “As-Is” Value, “After-Improved” Value, costs of construction and the draw schedule of the renovation portion of the loan. This work typically adds about a week to the approval process, largely because it should be done BEFORE contracts are signed.
SOME UNIQUE FEATURES OF THE 203K
- Mixed-Use Properties may be eligible! As long as the commercial space is no more than the allowable square footage based on the number of floors in the building and none of the renovation monies are used for a commercial renovation, the 203K gives tremendous interest rates for Mixed-Use Properties.
- The loan can be used to change property usage (when appropriate municipality approval)…..converting a 1 Family Home to a 2 Family or a 4 Family to a 3 Family or any variation that stays within the 1-4 Family boundaries works.
- On major renovations we will finance up to six months payments into the loan. In these cases,the house will not be habitable until after the work is completed.
- There is a Streamline 203K for projects that require less than $35,000 of repairs. Typically, we like to see only one or two items of work that can be done quickly (with one inspection).
It is recommended that you work with an experienced loan officer when exploring the 203K Program, as there are many details that need to be considered (from selecting a qualified contractor to the inner workings of the draw schedule and preparing for different contingencies). While the program is more intricate, with the right education ahead of time, it is extremely manageable.