If you have ever driven by an abandoned property and wondered how you could fix it up like new, you are not alone. Many people have distressed properties on their radar, looking at their potential rather than their neglect. Renovation Home Loans, through federally-backed funds, make it possible to finance a home and repair / upgrade it at the same time. These loans are known as “203K Rehab Loans”!
Although people use “203K” very loosely, there are actually several Renovation Loans available to meet a wide array of financing goals and I will go through the differences between each Renovation Loan and share advantages of using one over the other but they all share the same basic concept.
A Renovation Loan “203k” lets you purchase or refinance and rehabilitate a property with one loan, one approval process and one payment. The projected rehabilitation costs are held in an escrow account established by the Lender and disbursed as work is completed and inspected. The loan amount / down payment is based on the projected market value of the property when all repairs are completed or sales price plus renovation costs, whichever is lower. On all Renovation Loans the renovation budget will include labor, material, permit costs, inspection fees, up to 6 months of financed mortgage payments, and a contingency reserve fund of at least 10% to cover unforeseen repairs during the renovation phase.
Some General benefits across the board that is applicable with all renovation loan products:
You can purchase a home that does not require repairs and finance the cost of “modernization” or cosmetic repairs
The loan enables you to purchase distressed properties that require repairs including Short Sales and Foreclosure properties that are sold in As-Is condition to cash only buyers
Properties in “below-average” condition can be upgraded through repairs and maintenance
Where zoning allows, a Renovation Loan can be used to convert a single family dwelling to 2-4 units and vice versa.
Up to six months of PITI (principal, interest, tax and insurance) payments can be financed to assist those who would otherwise be required to make double-housing payments.
A Renovation Loan can be used for complete reconstruction of a home on its original foundation
Increase square footage by building an addition, building a second floor or finishing a basement or attic space
Make Improvements for accessibility for persons with disabilities
FHA 203(k) Loans – Purchase and Refinance
A “203K” loan has become the slang term for all renovation loans however it is actually the name of the FHA Renovation Loan. An FHA 203K is available for Owner-Occupied primary residence transactions only and has looser credit requirements allowing lower credit scores with expanded debt to income ratios up to 55% with as little as 3.5% down payment on a purchase and little to no out of pocket expenses upfront on a 203K Renovation Refinance. The 203K loan amount is based on the Lessor of the Total Acquisition Cost or 110% of the Projected after improved value so the renovations do not have to be $1 for $1 in value.
The FHA 203K Renovation Loan can be completed under either a Limited K Loan or a Consultant K Loan. Choosing which loan suits you best will depend on the amount and type of improvements the property needs.
Limited K: The Limited K program is for homes needing limited repairs and requiring relatively little expertise to manage. This is primarily designed for a “streamlined” project where the home can be occupied immediately after closing, and the contractor will receive one draw in the amount of 50% of the total contract and the final payment at completion. It has no minimum repair costs but has a cap of $35,000 (which leaves the labor and material budget at about $31,000). Examples of Limited K repairs.
- Repair/replacement/ Upgrade of: Roof, HVAC, Plumbing / Electrical systems, Appliances, Flooring, Decks, Patios, Septic/Well Systems
- Minor remodeling / Kitchen / Bathrooms
- Interior / Exterior Painting
- Replacing Windows / Doors / Siding
- Swimming pool repairs
- Improvements to add accessibility for persons with disabilities
Sample FHA 203K Limited Project Before / After Photos:
Consultant K: The Consultant K is typically used for homes that need repairs in excess of $35,000 or require structural repairs; however there must be at least $5,000 worth of repairs. The Consultant K program allows for more extensive work to be done and has little restrictions on what can be done with the exception of luxury items like pools, spas, gazebos, tennis courts, etc…Examples of Consultant K repairs:
• Structural Alterations / Additions
• New Attached / Detached Garage
• Major landscaping
Sample FHA 203K Consultant Project Before / After:
All FHA 203K Renovation Loans require both Upfront Mortgage Insurance and Monthly Mortgage insurance for the life of the loan.
Fannie Mae HomeStyle® – Purchase AND Refinance
This HomeStyle® Renovation Loan is very attractive since unlike the FHA 203K there is no Mortgage Insurance if you put a 20% down payment. This Renovation Loan is also available to Owner Occupied, 2nd Home and Investment Buyers unlike the FHA 203K being restricted to only Owner Occupied Buyers.
The credit qualifying is a little tighter on this product in regards to previous foreclosures, short sales and BK’s but otherwise as an Owner Occupied Buyer if you have a minimum of a 620 Credit Score you can borrower up to 95% with mortgage insurance (available as a monthly premium, upfront premium or lender paid premium), however unlike the FHA 203K the monthly mortgage insurance will automatically go away once your balance drops to 78% of the original appraised value. If you are buying as a 2nd home or Investment Property you will need a minimum of 20% down payment with a minimum credit score of 620; however 2-4 units are not eligible as a 2nd home or Investment property.
The debt to income ratios are more restrictive than the FHA 203K but generally will go up to 45% compared to FHA 203K max of 55%. With the HomeStyle® Renovation Loan, the Loan Amount is based on 100% of the After Improved value unlike the FHA 203K basing the loan on up to 110% of the After Improved value. A huge difference with the HomeStyle® Renovation Loan is that you can complete Luxury Items in the Renovation Budget, such as: Pools / Gazebos / Pool House / Tennis Courts, etc.
Sample HomeStyle® Renovation Project Before / After:
Renovation Home Loans provide you with an outlet to improve your home’s functionality and appearance. Set your goals for your new or existing property and call me today, if you think it is time to modernize your space.
Call me today to discuss your Renovation Loan Options at 916-235-3989 – I have been helping clients with mortgage loan needs since 1999 and I specialize in FHA 203K Renovation Loans in California! (Read More about Sheri here)